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:
A)scenario analysis.
B)IRR analysis.
C)accounting break-even analysis.
D)sensitivity analysis.

Question

Quizplus · Accepted Answer

A sensitivity analysis breaks down the NPV calculation by showing how changes in one or more underlying assumptions affect the overall NPV. It helps identify the most important drivers of value and assesses the project's sensitivity to changes in these drivers. A scenario analysis involves more significant variations of key assumptions to identify possible outcomes and risks, while an IRR analysis calculates the rate of return that makes the net present value of all cash flows equal to zero. An accounting break-even analysis determines at what point a project generates enough revenue to cover its operating costs.

An Analysis That Breaks the NPV Calculation into Its Component