The correct answer is: Statement I is wrong, but Statement II is correct.
Statement I is wrong because the risk of a project is not adjusted by lessening the target payback period. In fact, lessening the target payback period can actually increase the risk of a project, as it may lead to the project being approved even if it is not a good investment.
Statement II is correct because sensitivity analysis helps in calculating the net present value of a proposal by showing how the net present value changes in response to changes in key assumptions. This information can be used to assess the risk of a project and to make decisions about whether or not to proceed with it.
Here is a more detailed explanation of each statement:
Statement I: In payback period method, the risk of the project is adjusted by lessening the target payback period.
This statement is wrong because the risk of a project is not adjusted by lessening the target payback period. In fact, lessening the target payback period can actually increase the risk of a project, as it may lead to the project being approved even if it is not a good investment.
The payback period is the amount of time it takes for a project to recover its initial investment. A shorter payback period is generally considered to be better, as it means that the project will generate cash flow more quickly. However, a shorter payback period also means that the project is more risky, as it is more likely to be abandoned before it has had a chance to generate a profit.
Therefore, lessening the target payback period does not reduce the risk of a project; it actually increases the risk.
Statement II: Sensitivity analysis helps in calculation of net present value of the proposal.
This statement is correct because sensitivity analysis helps in calculating the net present value of a proposal by showing how the net present value changes in response to changes in key assumptions. This information can be used to assess the risk of a project and to make decisions about whether or not to proceed with it.
Sensitivity analysis is a technique that is used to assess the impact of changes in key assumptions on the results of a project. For example, a sensitivity analysis for a construction project might show how the net present value of the project changes if the cost of materials increases or if the construction time is extended.
Sensitivity analysis can be used to identify the key assumptions that have the most impact on the results of a project. This information can then be used to make decisions about whether or not to proceed with the project, or to make changes to the project in order to reduce its risk.