The correct answer to the question is b) Sensitivity analysis. It refers to a financial tool that assigns probabilities to different cash flow estimates to explore various financial scenarios and manage risks.
Conducting a sensitivity analysis on cash flow involves assigning a + or - probability to the estimated value. This is a strategic tool used in financial analysis to determine how different values of an independent variable affect a particular dependent variable under a given set of assumptions. In the context of cash flow, it helps to understand the risks associated with the variability in income and expenditures, enabling more accurate financial forecasting and decision-making.
In sensitivity analysis, you test different scenarios of cash inflows and outflows to measure potential impacts on cash flow. A positive probability indicates an increase in cash flow, while a negative one suggests a decrease. This can be vital for managing financial health in a business
The correct answer is thus: b) Sensitivity analysis. By assigning probabilities to cash flow estimates, a company can explore the effects of different financial scenarios and plan accordingly. This practice is particularly useful for risk management and strategic planning within a business context.