Skip to content

CMA Final · Strategic Financial Management · Evaluation of Risky Proposals for Investment Decisions

In sensitivity analysis of a project, which statement is correct?

Sensitivity analysis measures how much NPV changes when one input variable, such as sales volume or cost, is changed while all other variables are held constant. It does not need probabilities or any distributional assumption.

  1. AIt assigns probabilities to each possible cash flow outcome
  2. BIt measures the change in NPV for a change in one variable while others are held constantCorrect
  3. CIt always gives a single risk-adjusted discount rate
  4. DIt requires the cash flows to be normally distributed

Explanation

Sensitivity analysis varies one input at a time, holding the others constant, and observes the effect on NPV. It does not use probabilities, so the first option describes probability analysis. It also does not need normality or yield a discount rate.

Did you get it right without looking?

One question tells you little. A timed set on Evaluation of Risky Proposals for Investment Decisions shows your real accuracy, how long you take and where you lose marks.

Practise Evaluation of Risky Proposals for Investment DecisionsFree diagnostic mock

More Evaluation of Risky Proposals for Investment Decisions questions