When projects involve certain, or constant, cash flows, the capital budgeting analysis that can be conducted is very simple and straightforward. Unfortunately, this type of project rarely exists.

When a project's cash flows, or the conditions that affect their magnitude or timing, vary from their expected values, then the analysis becomes more complicated. Projects that have the potential to exhibit greater or lesser levels of risk than the firm's average, or normal, level means that adjustments should be made to the capital budgeting analysis process.

Several techniques are used to assess the stand-alone risk, which reflects the uncertainty about the project's cash flows. Some of these techniques are: (1) sensitivity analysis, (2) scenario analysis, and (3) Monte Carlo simulation.

When a firm is performing a sensitivity or a scenario analysis on a project, it will generate abest-case scenario or best-case net present value (NPV)?when it uses the most likely values for its key variables in its calculations.

When performing scenario analysis, the expected net present value (NPV)will rarely be equal to or will always be equal to? the base-case NPV.