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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

In sensitivity analysis of a capital project, the analyst:

Sensitivity analysis examines how NPV changes when a single variable, such as sales, price or cost, is altered while all other variables are held constant. It identifies which inputs the project's viability depends on most, without requiring probability estimates.

  1. AAssigns probabilities to every possible outcome and computes expected NPV
  2. BChanges one key variable at a time, keeping others constant, to see its effect on NPVCorrect
  3. CBuilds a decision tree of sequential decisions and chance events
  4. DDiscounts all cash flows at the risk-free rate

Explanation

Sensitivity analysis varies one input, such as sales volume or selling price, while holding others fixed, to find how much NPV changes. Option A describes probability-based analysis and option C describes decision tree analysis.

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