Which approach estimates NPV by taking a distribution of values for each of the model's assumptions?

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Quizplus · Accepted Answer

Monte Carlo simulation is the approach that estimates NPV by taking a distribution of values for each of the model's assumptions. It uses random sampling and mathematical modeling techniques to simulate the range of possible outcomes and their probabilities. This helps in evaluating the risk and uncertainty associated with the project and in making better-informed decisions. Forecasting simulation, sensitivity analysis, and scenario analysis are other approaches for analyzing project risks and uncertainties but they do not involve generating a distribution of values for each assumption like Monte Carlo simulation.

Which Approach Estimates NPV by Taking a Distribution of Values