What analysis technique should a manager use to assess changes in cash flows on a project's net present value?

What analysis technique should a manager use to assess changes in cash flows on a project's net present value?

• A. Risk analysis
• B. Scenario analysis
• C. Sensitivity analysis
• D. ROI analysis

Answer: (C)

Sensitivity analysis is the most appropriate technique for assessing how changes in cash flows impact a project's net present value (NPV). This method involves evaluating how sensitive the NPV is to variations in key input variables, such as cash inflows, outflows, and discount rates. By systematically adjusting one variable at a time while keeping others constant, a manager can pinpoint which factors have the most significant effect on the NPV, allowing for better-informed decision-making. Sensitivity analysis not only highlights the degree of impact variations have on the project's viability but also helps in understanding the risk associated with those variations. This makes it a crucial tool for managers trying to optimize project returns and minimize financial risks.

Sensitivity analysis is the most appropriate technique for assessing how changes in cash flows impact a project's net present value (NPV). This method involves evaluating how sensitive the NPV is to variations in key input variables, such as cash inflows, outflows, and discount rates. By systematically adjusting one variable at a time while keeping others constant, a manager can pinpoint which factors have the most significant effect on the NPV, allowing for better-informed decision-making.

Sensitivity analysis not only highlights the degree of impact variations have on the project's viability but also helps in understanding the risk associated with those variations. This makes it a crucial tool for managers trying to optimize project returns and minimize financial risks.