Question
6. Sensitivity and scenario analysis Different techniques for analyzing project risk require different input variables and assumptions. The procedure in which a set of key
6. Sensitivity and scenario analysis
Different techniques for analyzing project risk require different input variables and assumptions.
The procedure in which a set of key elements affecting the expected value are changed to study the effect on the expected value is called _________ analysis.
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.
-20-15-10-505101520NPV (Millions of dollars)CHANGES IN UNITS SOLD (Percent)Base Case NPVBase Case Units Sold
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 ______ .
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 | $3.50 million | 0.20 |
Most likely | $5.62 million | 0.45 |
Optimistic | $11.34 million | 0.35 |
Complete the missing information in Kathys report:
The expected net present value of the project is _____________ .
Standard deviation of the net present value (the NPV of the project is likely to vary by) ______ million.
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