CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation
Compared with scenario analysis, Monte Carlo simulation of project NPV is most likely to:
Monte Carlo simulation produces a probability distribution of possible NPV outcomes because it draws inputs from specified distributions over many trials. It needs more assumptions than scenario analysis, which uses a few discrete cases.
- ARequire fewer assumptions about inputs
- BProduce a probability distribution of NPV outcomesCorrect
- CBe limited to a few discrete outcomes
Explanation
Monte Carlo simulation samples inputs from specified distributions across many trials, producing a distribution of NPV. It requires more assumptions, not fewer, since distributions and correlations must be specified. Limiting results to a few discrete outcomes describes scenario analysis.
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