FIN 401 : practice questions and solutions

Which of the following options provides the most information about a project’s riskiness?

a) Sensitivity analysis

b) Certainty equivalent method

c) Scenario analysis

d) Risk-adjusted discount rate method

e) Monte Carlo simulation

Which of the following technique is NOT used to assess an investment project’s risk (for NPV estimation)?

a. Variance analysis (e.g., compare the difference between the predicted and actual values.)

b. Sensitivity analysis (e.g., pay more attention to the steeper line.)

c. Scenario analysis (e.g., investigate the best, average, and worst cases.)

d. Monte Carlo simulation (e.g., based on 1,000 or 10,000 random runs.)

An analysis that breaks the NPV calculation into its component assumptions and shows how the NPV varies as one of the underlying assumptions is changed is called