__________measure(s) the risk of a capital budgeting project by estimating the NPVs associated with the optimistic, most likely, and pessimistic cash flow estimates.
A) Multiple regression analysis
B) Simulations
C) Risk-adjusted discount rates
D) Sensitivity analysis

Question

Quizplus · Accepted Answer

Sensitivity analysis is the best choice to estimate the risk of a capital budgeting project by estimating the NPVs associated with the optimistic, most likely, and pessimistic cash flow estimates. Sensitivity analysis involves changing one input variable at a time to see how it affects the NPV, allowing for an evaluation of the project's sensitivity to different factors. Through this analysis, a decision maker can assess the project's overall risk and identify which factors have the greatest impact on the project's performance. The other choices may also be useful in risk estimation but are not specifically tailored to assess the impact of cash flow estimates.

__________Measure(s) the Risk of a Capital Budgeting Project by Estimating