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Question 1: How do you define Forecasting Risk?
Forecasting risk is defined as the probability regarding financial decision failures that may rise due to certain circumstances. Such cases occur in case of the new product or project launch where the assessment of risk can only cover the predictable factors. There is need to make sure the financial matters are in safe position which means that financial risks are assessed and analyzed thoroughly. The first question that we may ask regarding this is how certain we are that new product are better than the competitors’ product? Which addresses the market stand point of the firm and secondly are the production being done on the lowest possible cost? And does the distribution is effectively conducted through identified markets and proper channel of distribution where markets are developed and gained control over. The new product and projects are riskier and hence need more close analysis in the process of development.
Question 2: Explain Sensitivity Analysis and Scenario Analysis.
The Sensitivity analysis determines the single variable over the variables in broad range and values while in the scenario analysis the limited range of the variable value are determined and assessed. The analysis is an important part of the decision making and regarding these two analyses they provide information regarding the failure or success of the investments. These analyses are used by business,. Firms and individuals to determine whether their future profits will satisfy their current investment plans and decisions. The findings help them invest in the right funds and securities as well as projects. The analysis also helps in the process of stock investments, Company sale and acquisition bas well as personal investment. The sensitivity analysis addresses the single variable that impacts the investment decision. It is analyzed by changing its value while in the case of scenario analysis all possible range of variables that impact the investment decision are assessed and analyzed.
Question 3: Concept of Marginal Cash Flows.
Yes, in case the average revenue of business is less than the average cost then the business is at loss which means it is unable to cover its costs. And this statement is true when the businesses at marginal level are capable to accept projects and investment to strengthen their operation and make their cash flow with marginal revenues that also follow exceeding marginal costs.
Question 4: What doe Break-Even Point mean?
The Break-even point is defined as the level of revenue or earning that fully covers the level of costs. In this point no revenues are generated but the cots are covered which means no lose no win for business is gathered. If the level of breakeven point is higher than the risk of investment will also be higher. The shareholders perspective is understood in terms of breakeven point as the investment projects may exceed its break even point and gather revenues. The financial and the accounting break even points both are needed to be addressed in order to make sure the decision taken by investors is fully covered. The two break even points may represent different perspectives on how much and how higher the margin of revenue is from the level of costs.
Question 5: Planned Break-Even Point by different businesses.
There are series of certain break-even points that every business has planned to reach in certain time frame. The first breakeven point is the cash break-even point that can be followed by the accounting break-even point while the financial breakeven point is usually planned to come at last . These three break even points are applied to all investment projects and sales in the same pattern. The cash breakeven point excludes the depreciation when it is achieved but the accounting break-even point includes the depreciation. The financial breakeven point also addresses the TMV (time value of money).
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