6. Sensitivity and scenario analysis

Different techniques for analyzing project risk require different input variables and assumptions.

Suppose you are using the sensitivity analysis technique to evaluate project risk. You would change _________ in the model to evaluate the effect of the input factors on the expected value. A. One input variable at a time B. Several input variables together

Kathy is a risk analyst. She is conducting a sensitivity analysis to evaluate the riskiness of a new project that her company is considering investing in. Her risk analysis report includes the sensitivity curve shown on the graph.

This curve implies that the project is very sensitive to changes in units sold. The projects NPV is likely to become negative if the number of units sold decreases by _______ . A. 10% B. 5%

Along with the sensitivity analysis, Kathy is including a scenario analysis for the project in her report, giving the probability of the project generating a negative NPV. Her report includes the following information about the scenario analysis:

	Data Collected
Outcome	NPVjNPVj	Probability (PjPj)
Pessimistic	$5.62 million	0.35
Most likely	$7.94 million	0.30
Optimistic	$16.45 million	0.35

Complete the missing information in Kathys report:

The expected net present value of the project is ________ million. A. $6.17 B. $2.06 C. $6.85 D. $0.93

Standard deviation of the net present value (the NPV of the project is likely to vary by) ________ million. A. $9.33 B. $10.68 C. $10.17 D. $9.30

? Base Case NPV I -4, 4.1 NPV (Millions of dollars) Base Case Units Sold > 20 -20 -15 -10 -5 0 5 10 15 CHANGES IN UNITS SOLD (Percent)