Scenario Analysis the determination of what happens to NPV estimates when we

# Scenario analysis the determination of what happens

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Scenario Analysis: the determination of what happens to NPV estimates when we ask what-if questions. Sensitivity Analysis: investigation of what happens to NPV when only one variable is changed. Simulation Analysis: a combination of scenario and sensitivity analysis. Variable Costs: costs that change when the quantity of output changes. Fixed Costs: costs that do not change when the quantity of output changes during a particular time period. Marginal, or Incremental, Cost: the change in costs that occurs when there is a small change in output. Marginal, or Incremental, Revenue: the change in revenue that occurs when there is a small change in output. Accounting Break-Even: The sales level that results in zero project net income. Cash Break-Even: the sales level that results in a zero operating cash flow. Financial Break-Even: the sales level that results in a zero NPV. Operating Leverage: the degree to which a firm or project relies on fixed costs. Degree of Operating Leverage (DOL): the percentage change in operating cash flow relative to the percentage change in quantity sold. Capital Rationing: the situation that exists if a firm has positive NPV projects but cannot find the necessary financing. Soft Rationing: the situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting. Hard Rationing: the situation that occurs when a business cannot raise financing for a project under any circumstance. Chapter 3 Computing Liquidity Ratios Current Ratio = CA / CL Quick Ratio = (CA – Inventory) / CL Cash Ratio = Cash / CL NWC to Total Assets = NWC / TA Interval Measure = CA / average daily operating costs Computing Long-Term Solvency Ratios Total Debt Ratio = (TA – TE) / TA Debt/Equity = TD / TE Equity Multiplier = TA / TE = 1 + D/E Long-term debt ratio = LTD / (LTD + TE) Computing Coverage Ratios Times Interest Earned = EBIT / Interest Cash Coverage = (EBIT + Depreciation) / Interest Computing Inventory Ratios Inventory Turnover = Cost of Goods Sold / Inventory Days’ Sales in Inventory = 365 / Inventory Turnover Computing Receivables Ratios Receivables Turnover = Sales / Accounts Receivable Days’ Sales in Receivables = 365 / Receivables Turnover Computing Total Asset Turnover Total Asset Turnover = Sales / Total Assets It is not unusual for TAT < 1, especially if a firm has a large amount of fixed assets NWC Turnover = Sales / NWC Fixed Asset Turnover = Sales / NFA