Widget Corp. wants to make a capital investment. However, before making the investment, the company wants to thoroughly analyze all the risks related to politics, economy, inflation, and tax that can jeopardize its investment plan. Given the scenario, which of the following analysis methods should the company use to assess the riskiness of the capital investment using net present value (NPV)?

Question

Quizplus · Accepted Answer

Sensitivity analysis is the correct method for assessing the riskiness of a capital investment using net present value (NPV) as it allows the company to understand how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This method is particularly useful in analyzing the effect of changes in economic factors such as inflation, interest rates, and tax rates on the investment's NPV.