ACCA Financial Management (F9) Certification Practice Exam

Which analysis method involves examining NPVs of a project across multiple scenarios?

1. Sensitivity analysis

2. Scenario building

3. Payback period

4. Risk assessment

The correct answer is: Scenario building

The method that involves examining NPVs (Net Present Values) of a project across multiple scenarios is scenario building. This approach allows financial analysts to consider different future states of the project by varying key assumptions such as cash flows, discount rates, and project costs. By constructing multiple scenarios, analysts can compare how each scenario impacts the NPV, which in turn helps in understanding potential outcomes and making informed investment decisions. This is particularly important when faced with uncertainty in predicting economic conditions or project performance. Sensitivity analysis, although related, focuses specifically on how sensitive the NPV is to changes in one or two key variables rather than exploring multiple overall scenarios. The payback period method simply calculates the time it takes for an investment to repay its initial cost and does not address varying conditions. Risk assessment generally involves identifying and evaluating the potential risks associated with a project but does not specifically deal with different scenarios affecting NPV.