Question

You are considering a project and are concerned about the reliability of the cash flow forecasts....

You are considering a project and are concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should consider:
Lowering the degree of operating leverage.
Lowering the contribution margin per unit.
Increasing the initial cash outlay.
Increasing the fixed costs per unit.
Lowering the operating cash flow.
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Answer #1

Lowering the degree of operating leverage

Since the cash flows are not yet reliable it will be useful to reduce the operating leverage. This is the percentage change in operating cash flow relative to the percentage change in quantity sold. Reducing the leverage will ensure that the operating cash flow change at a lower rate to the sales and this will reduce the risk of the project.

The other options are not viable since they will give an incorrect picture of the cash flows and are pointing towards incorrect computations.

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