The technique for incorporating Risk into capital budgeting that involves the use of numbers drawn randomly from probability distributions is called a:
A)probability simulation.
B)scenario analysis.
C)sensitivity analysis.
D)Monte Carlo simulation.

Question

Quizplus · Accepted Answer

The technique of incorporating risk into capital budgeting through the use of numbers drawn randomly from probability distributions is known as Monte Carlo simulation. Therefore, option D is the correct answer. Option A, probability simulation, is a broad term that can refer to various techniques used to model uncertain events. Option B, scenario analysis, is a technique that involves analyzing the potential outcomes of specific scenarios that may occur in the future. Option C, sensitivity analysis, involves examining how changes in certain inputs or assumptions affect the output of a financial model. While sensitivity analysis is related to assessing risk, it is not the same as Monte Carlo simulation, which specifically involves randomly generating inputs to see how a model behaves under different conditions.

The Technique for Incorporating Risk into Capital Budgeting That Involves