An analysis that breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as one of the underlying assumptions changes is called ________.
A) scenario analysis
B) internal rate of return (IRR) analysis
C) accounting break-even analysis
D) sensitivity analysis

Question

Quizplus · Accepted Answer

The definition provided is for sensitivity analysis, which examines how changes in one variable (such as sales volume) affect the overall NPV. Scenario analysis involves creating multiple possible scenarios (such as best case, worst case, and most likely) and calculating NPV under each one. IRR analysis focuses on finding the discount rate at which the project's NPV is zero. Accounting break-even analysis determines the level of sales required for the project to break even, but does not directly consider the time value of money as NPV does.

An Analysis That Breaks the Net Present Value (NPV) Calculation