5. Methods of analyzing risk for capital budgeting decisions Several types of analyses are available for evaluating a project's risk. In the following table, correctly identify the analysis being described. Scenario Analysis Sensitivity Analysis Simulation Analysis Uses computers to consider a large number of possibilities for a project Examines the effect of simultaneous changes in multiple drivers of a project's NPV Measures the change in NPV that occurs when only one variable is changed 0 0 Consider the following case: Coppinger Corp. is evaluating a new project. Coppinger used the expected values of unit sales, price per unit, and variable cost per unit to calculate an expected NPV of $13,500. Coppinger has developed a few different possible cases of what demand and costs might look like for the new project, which are summarized in this table: NPV Base case Worst case Best case $13,500 Unit Sales 120,000 70,000 150,000 Price per Unit $6.00 $5.50 $6.50 Variable Cost per Unit $4.25 $5.25 -$22,600 $3.80 $31,200 What kind of risk analysis is Coppinger using? O Simulation analysis O Scenario analysis O Sensitivity analysis Suppose Coppinger Corp. is evaluating a new capital budgeting project and conducting some basic risk analysis. First, it calculates the project's NPV at various levels for the project's key input variables. Coppinger next calculates the project's NPV at various prices per unit, plots the results on the accompanying graph, and then repeats this process separately for variable cost per unit and required return. This process is a , whose results are shown on the graph. a) sensitivity analysis b) simulation analysis c) scenario analysis NPV (Millions of $1 200 Price per Unit Required Return -120 Variable Cost per Unit -200 -20 -12 - 4 12 20 DEVIATION (%) According to this analysis, which variable is the key value driver for the project? O Variable cost per unit O Price per unit O Required return At the current input-value estimates, does this project have a positive or negative NPV? O Negative NPV O Positive NPV Decision trees are a visual representation of the sequential choices that financial decision makers face when making capital budgeting and investment decisions. True or False: Typically the beginning of the project is riskier than later stages. a) True b) False