Answered step by step
Verified Expert Solution
Question
1 Approved Answer
3. Measuring stand-alone risk When projects involve certain, or constant, cash flows, the capital budgeting analysis that can be conducted is very simple and straightforward.
3. Measuring stand-alone risk 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 complicated. Projects that have the potential to exhibit greater or lesser levels of risk than the firm's average, or normal level 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. measures the percentage change in the net present value (NPV) that results from a given percentage change in one of the input variables while all other variables are held constant at their expected values. allows more than one variable at a time to be changed, and it takes into account the probabilities of changes in the key variables
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started