PROJECT ANALYSIS AND EVALUATION
Answers to Concepts Review and Critical Thinking Questions
1. Forecasting risk is the risk that a poor decision is made because of errors in projected cash flows. The
danger is greatest with a new product because the cash flows are probably harder to predict.
2. With a sensitivity analysis, one variable is examined over a broad range of values. With a scenario
analysis, all variables are examined for a limited range of values.
3. It is true that if average revenue is less than average cost, the firm is losing money. This much of the
4. It makes wages and salaries a fixed cost, driving up operating leverage.
5. Fixed costs are relatively high because airlines are relatively capital intensive (and airplanes are
expensive). Skilled employees such as pilots and mechanics mean relatively high wages which, because
6. From the shareholder perspective, the financial break-even point is the most important. A project can
7. The project will reach the cash break-even first, the accounting break-even next and finally the financial
break-even. For a project with an initial investment and sales after, this ordering will always apply. The
8. Soft capital rationing implies that the firm as a whole isn’t short of capital, but the division or project
does not have the necessary capital. The implication is that the firm is passing up positive NPV projects.
9. The implication is that they will face hard capital rationing.