5. Methods of analyzing risk for capital budgeting decisions Several types of analyses are available for evaluating a project's risk. In the following table, correctly identify the analysis being described. Scenario Analysis Sensitivity Analysis Simulation Analysis O Uses an algorithmic method to pick values randomly from probability distributions to calculate a project's NPV O 0 Requires changes in one assumption at a time to observe the impact on NPV o a O Estimates the NPV after a given period of time, assuming specific changes in the values of multiple key factors that could affect a project's NPV Consider the following case: Coppinger Corp. is considering the use of a computer to assign probability distributions to the input variables used in the analysis. The computer would then randomly select input variables from their distributions and calculate NPVs based on those selections. What kind of analysis is this? O Scenario analysis Simulation analysis O Sensitivity analysis Suppose Coppinger Corp. Is evaluating a new capital budgeting project and conducting some basic risk analysis. First, it calculates the project's NPV at various levels for the project's key input variables. Coppinger next calculates the project's NPV at various prices per unit, plots the results on the accompanying graph, and then repeats this process separately for variable cost per unit and required return. This process is a whose results are shown on the graph. NPV IMillions of $1 200 Price per Unit 123 40 Required Return -120 Varie Cost per Unit -200 -20 -12 -4 4 12 20 DEVIATION IN According to this analysis, which variable is the key value driver for the project? O Required return Variable cost per unit Price per unit At the current input value estimates, does this project have a positive or negative NPV? O Negative NPV Positive NPV Decision trees are a visual representation of the sequential choices that financial decision makers face when making capital budgeting and investment decisions. True or False: The beginning of the project is less risky than later stages