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5. Measuring stand-alone risk When propects invelve certain, or constant, cash flows, the copital budgeting analysia that can be conducted is very simple and straightforward.
5. Measuring stand-alone risk When propects invelve certain, or constant, cash flows, the copital budgeting analysia that can be conducted is very simple and straightforward. Unfortunately, this type of project rarely exists. When a project each flows, or the condtions that affect their mognitude or timing, vary from their expected values, then the analyais becomes more complicated. Prolects that huve the potential to exdibit greater or lesser levels of riek than the firmin averege, or normal, level meane that edjustments ahould be made to the copital budgeting analywis procres. Beveral techniques are used to asseses the stand alone risk, which rellects the uncertainty about the projectib cashl flows, Some of thesse trikinges area (1) seneitivily andlyeis, (2) scenario analyeis, and (3) Monte Carlo elmulation: Whien a firm is performins a sensitivity or a scenario andlyais on a project, it will generate a the most likely values for its key variabies in its culaulations: When its teses E a riak andivis techinipue that uses epphisticated soltware to analyee a large number of iscenarios and generite catimated retes of return and riak indexis
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