Which of the following methods for examining a project's stand-alone risk cannot be effectively conducted without the use of a random number generator? Choose the best answer.
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A. B. C. D. E. F.D
Monte Carlo Simulation seeks to examine the NPV of a project throughout a large series of possible values for input variables. When measuring stand-alone risk using Monte Carlo Simulation, the use of a computer and rather complex software package is necessary. In Monte Carlo Simulation, the expected ranges of input variables are specified, and random numbers are incorporated into the analysis function, producing a NPV value across a wide range of possible situations. Monte
Carlo Simulation is so named because the technique evolved largely from methods used to analyze probabilities in casino gambling. Scenario analysis involves the establishment of a "best case" and "worst case" scenario, which is compared to a predetermined "base case." Sensitivity Analysis seeks to determine the sensitivity of a project's NPV to changes in specific input variables, and "Probability Analysis" can be conducted using simple statistical formulas. None of these three methods require the use of a random number generator.