If a firm is interested in the distribution of the NPV for a project that it is considering, then the firm should be most interested in:
A) a sensitivity analysis.
B) a scenario analysis.
C) a simulation analysis.
D) a horizontal analysis.

Question

Quizplus · Accepted Answer

A simulation analysis would be the best choice for determining the distribution of NPV for a project. This analysis uses a computer model to generate the NPV under different sets of assumptions and inputs, allowing the firm to see the range of potential outcomes and the probability of each outcome. Sensitivity analysis and scenario analysis may provide some information on the potential impact of changes in inputs or assumptions, but they do not provide a full picture of the distribution of potential NPVs. Horizontal analysis is a method of comparing financial statements across multiple periods or companies and is not relevant to this situation.

If a Firm Is Interested in the Distribution of the NPV