Question

1.In scenario analysis, a good way to evaluate an opportunity is to compute the simple average of the NPVs of the outcomes over all of the scenarios you consider.

True

False

2.Even if the average NPV over all scenarios is negative, it may be possible to develop a staged investment strategy that would make the NPV positive, but could require sometimes abandoning the venture even after an investment has been made.

True

False

3.When using scenario analysis to evaluate an opportunity, if the NPVs of all scenarios are positive, it is not necessary to try to find a way to stage the investment

True

False

Answer 1

1. This is a TRUE Statement as when there are a lot of scenarios it is better to calculate the average of the net present value of all scenarios. Averaging out of the present value would provide with a better idea of whether to accept the projects or not.

2. This given statement is TRUE because even after the average of net present value of all scenarios are negative, it is still possible to develop a staged investment and then if it is not successful it can be abandoned in the future.

3. This given statement is is a FALSE statement because according to scenario analysis if net present value of all scenarios are positive, it is still necessary to try to find the way to stage the investment. So staging an investment is not an unnecessary step.