Ottomony is considering an all-in-one retail center where the NPV of the project has an expected value with a distribution that yields a standard deviation of $25 million. Ottomony came to this conclusion by analyzing the individual input distributions for the project. This analysis is called:
A) a sensitivity analysis.
B) a scenario analysis.
C) a simulation analysis.
D) a horizontal analysis.

Question

Quizplus · Accepted Answer

The analysis described in the question, where the expected value and standard deviation of the project's NPV are calculated by simulating various input distributions, is an example of a simulation analysis. Simulation analysis is often used in project finance to model the uncertainty around project cash flows and estimate the likelihood of different outcomes. Option A, sensitivity analysis, involves varying key inputs of a project (such as discount rate or revenue projections) and studying how they affect the NPV or IRR. Option B, scenario analysis, involves evaluating the impact of predetermined scenarios (such as a recession or a new competitor entering the market) on a project's financial metrics. Option D, horizontal analysis, is a technique used to analyze changes in a company's financial performance over time, typically by examining trends in financial statements.

Ottomony Is Considering an All-In-One Retail Center Where the NPV