CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation
A project's NPV is 8.0 million at the base-case discount rate. An analyst changes one input at a time, such as sales volume or unit cost, and records the resulting NPV for each change. This technique is best described as:
This is sensitivity analysis, because only one input is varied at a time with the others held constant to see how NPV responds. Scenario analysis varies several inputs together, and Monte Carlo simulation samples inputs from probability distributions.
- ASensitivity analysisCorrect
- BMonte Carlo simulation
- CScenario analysis
Explanation
Changing one input at a time while holding the others constant is sensitivity analysis. Scenario analysis changes several inputs together into defined cases. Monte Carlo simulation draws inputs from probability distributions over many trials.
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