An Analysis That Breaks the NPV Calculation into Its Component

question 13

Multiple Choice

An analysis that breaks the NPV calculation into its component assumptions and shows how the NPV varies as one of the underlying assumptions is changed is called:

• A)scenario analysis.
• B)IRR analysis.
• C)accounting break-even analysis.
• D)sensitivity analysis.

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Definitions:

Private-Sector Provision

Goods and services provided by businesses and private individuals rather than the government, often driven by profit.

Government Provision

The supply of goods or services by the government directly or through funding public institutions.

Rational-Ignorance Effect

The decision by individuals to remain uninformed about certain matters because the perceived cost of acquiring the information exceeds the expected benefit.

Shortsightedness Effect

The misallocation of resources that results because public-sector action is biased (1) in favor of proposals yielding clearly defined current benefits in exchange for difficult-to-identify future costs and (2) against proposals with clearly identifiable current costs that yield less concrete and less obvious future benefits.