Which of the following methods of measuring a project's stand-alone risk is characterized by using a computer to analyze a project's NPV across a wide range of values for numerous input variables? (Hint: This style of analysis evolved from methods used to examine probabilities in casino gambling.)
Click on the arrows to vote for the correct answer
A. B. C. D. E.B
When measuring stand-alone risk using Monte Carlo Simulation, the use of a computer and a rather complex software package is necessary. In Monte Carlo
Simulation, the expected ranges of inputvariables 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 absolutely require the use of a computer or complex statistical software package.