Suppose we compare the difference between the NPV of a financial model in which the means are entered for all input random variables and the NPV of a financial model in which the most likely values are entered for all input random variables. A large difference between the NPV's demonstrate:
A) the value at risk (VAR)
B) the effect of randomness
C) the flaw of averages
D) the bias of the analyst
E) none of these choices

Question

Quizplus · Accepted Answer

This demonstrates the flaw of averages, as using only the most likely values instead of the full distribution can lead to a significant misleading result in the NPV calculation. The difference between the NPVs shows the impact of variability and the importance of considering the full range of potential outcomes. It is not related to value at risk, analyst bias, or the overall effect of randomness.

Suppose We Compare the Difference Between the NPV of a Financial