ACCA FM · Chapter 9 · Question 2 of 8
In sensitivity analysis, what does the maximum cost of capital at which a project remains acceptable equal?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) The project's internal rate of return
Explanation
The NPV of a conventional project falls as the discount rate rises and becomes zero at the IRR. The sensitivity of the project to the cost of capital is therefore measured by comparing the IRR with the current cost of capital: the difference is the margin of safety.
More Risk and uncertainty in investment appraisal MCQs
- Q4Which of the following correctly distinguishes risk from uncertainty in investment appraisal?
- Q5Which of the following is a limitation of sensitivity analysis?
- Q6A project costs $70,000 now. The year 1 cash inflow will be $50,000 (probability 0.6) or $30,000 (probability 0.4). Independently, the…
- Q7A project has an initial investment of $250,000 and an NPV of $30,000. By what percentage could the initial investment increase before the…
- Q8Which of the following is a limitation of using expected NPV to decide whether to accept a one-off project?