Answer (B) is correct . Forecasts of many calculated NPVs under various assumptions are compared to see how sensitive NPV is to changing conditions. Changing or relaxing the assumptions about a certain variable or group of variables may drastically alter the NPV. Thus, the asset may appear to be much riskier than was originally predicted. In summary, sensitivity analysis is simply an iterative process of recalculated returns based on changing assumptions.
Answer (A) is incorrect because Scenario analysis is not used for quantitative calculations.
Answer (C) is incorrect because Monte Carlo simulation is used to account for an element of randomness. The?changes in operating income and life of the project in this situation are under the control of the person running the simulation and thus are not random.
Answer (D) is incorrect because Learning curve analysis is used to anticipate the increased rate at which people perform tasks as they gain experience; it is not an appropriate tool for capital budgeting.
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