4. Project Analysis [25 Marks] 1) State whether the following statements are true or false and provide an explanation. [

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4 Project Analysis 25 Marks 1 State Whether The Following Statements Are True Or False And Provide An Explanation 1 (102.62 KiB) Viewed 14 times

4. Project Analysis [25 Marks] 1) State whether the following statements are true or false and provide an explanation. [10 Marks] a) While scenario analysis is forward-looking, sensitivity analysis attempts to reconstruct and analyse the past. b) The break-even level of sales for a project is higher when break-even is defined in terms of NPV rather than accounting income. c) Rather than basing one's estimate of NPV just on expected cash flows, it makes more sense to average the NPVs calculated from the pessimistic and optimistic estimates of cash flow. d) Monte Carlo Analysis allows for alternating multiple variables simultaneously. e) The option to abandon a project becomes more valuable as the possible outcomes become more varied. 2) A project has fixed costs of $1,000 and depreciation charges of $500 per year. Annual revenue is $6,000 and annual variable costs equal two-thirds of revenues. Calculate the degree of operating leverage (DOL) of this project and the percentage change in pre-tax profits if sales increase by 12%. [5 Marks] 3) Define real options and discuss why managerial flexibility is important in investment appraisal using the relevant examples. [10 Marks]