Theoretically the NPV is the most appropriate method to determine he acceptability of a project. A false sense of security can overwhelm the decision-maker when the procedure is applied properly and the positive NPV results are accepted blindly. Sensitivity and scenario analysis aid in the process by

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24-07-2018
Business

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Theoretically the NPV is the most appropriate method to determine he acceptability of a project. A false sense of security can overwhelm the decision-maker when the procedure is applied properly and the positive NPV results are accepted blindly. Sensitivity and scenario analysis aid in the process by

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arjungurung200pbw2h2 arjungurung200pbw2h2 · Answer 1 · 2018-07-26T04:15:37+02:00

Indeed, the NPV method is preferred to than the ARR, which is the simplier version. However, the NPV method, assuming that it is calculated by a risk-free cost of capital, fails to take into account that the furture is not always risk-free as the business environemnt is consistently changing. Therefore, sensitivity and scenario analysis take into account risks by altering some of the variables within the equation, for example the cost of capital used may not very well by as predicted and thus by planning ahead for the worst, the firm can somewhat anticipate and hopefully avoid a loss or at the least minimise it.