Question
Capital Budgeting Techniques for Risk Analysis : A company is evaluating an investment project with uncertain cash flows and estimates the following probabilities for different
Capital Budgeting Techniques for Risk Analysis: A company is evaluating an investment project with uncertain cash flows and estimates the following probabilities for different cash flow scenarios:
Scenario A: Probability 40%, Cash Flow $100,000 Scenario B: Probability 30%, Cash Flow $200,000 Scenario C: Probability 30%, Cash Flow $300,000
Using decision tree analysis or Monte Carlo simulation, calculate the expected net present value (NPV) and discuss how risk analysis techniques help managers make informed investment decisions in uncertain environments. Analyze the sensitivity of investment outcomes to changes in cash flow probabilities and discuss risk mitigation strategies.
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