Monte Carlo Simulation

question 13

Multiple Choice

Monte Carlo simulation:

• A)can be used to estimate a project's market risk, but cannot be used to determine its net present value (NPV).
• B)uses the probability distributions of variables as inputs to estimate the project's net present value (NPV).
• C)produces an expected net present value (NPV), an internal rate of return (IRR), and a measure of the project's risk for different scenarios.
• D)gives an exact outcome for a capital budgeting analysis.
• E)calculates net present value (NPV) for a change in one key variable.

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Definitions:

Discount Rate

The discount rate is the interest rate used in discounted cash flow analysis to determine the present value of future cash flows.

Net Cash Inflows

The total cash receipts minus cash payments over a period of time from operational, financial, and investing activities.

Profitability Index

A financial metric that measures the return on a project or investment relative to its cost, calculated by dividing the present value of future cash flows by the initial investment cost.

Internal Rate

Typically refers to the internal rate of return (IRR), which is a financial metric used to estimate the profitability of potential investments.