Methods of analyzing risk for capital budgeting decisions Several types of analyses are available for evaluating a projects risk In the following table, correctly identify the analysis being described Scenario Analysis Sensitivity Analysis Simulation Analysis Uses an algorithmic method to pick values randomly from probability distributions to calculate a projects NPV Requires changes in one assumption at a time to observe the impact on NPV Estimates the NPV after a given period of time, assuming specific changes in the values of multiple key factors that could affect a projects NPV 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 Unit Sales Price per Unit Variable Cost per Unit NPV Base case 120,000 $6 00 $4 25 $13,500 Worst case 70,000 $5 50 $5 25 $22,600 Best case 150,000 $6 50 $3 80 $31,200 What kind of risk analysis is Coppinger using Simulation analysis Sensitivity analysis Scenario analysis Suppose Coppinger Corp is evaluating a new capital budgeting project and conducting some basic risk analysis First, it calculates the projects NPV at various levels for the projects key input variables Coppinger next calculates the projects 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 According to this analysis, which variable is the key value driver for the project Required return Price per unit Variable cost per unit At the current input value estimates, does this project have a positive or negative NPV Positive NPV Negative 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 The beginning of the project is less risky than later stages

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Methods of analyzing risk for capital budgeting decisions Several types of analyses are available for evaluating a projects risk. In the following table, correctly identify

Methods of analyzing risk for capital budgeting decisions

Several types of analyses are available for evaluating a projects risk. In the following table, correctly identify the analysis being described.

	Scenario Analysis	Sensitivity Analysis	Simulation Analysis
Uses an algorithmic method to pick values randomly from probability distributions to calculate a projects NPV
Requires changes in one assumption at a time to observe the impact on NPV
Estimates the NPV after a given period of time, assuming specific changes in the values of multiple key factors that could affect a projects NPV

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:

	Unit Sales	Price per Unit	Variable Cost per Unit	NPV
Base case	120,000	$6.00	$4.25	$13,500
Worst case	70,000	$5.50	$5.25	$22,600
Best case	150,000	$6.50	$3.80	$31,200

What kind of risk analysis is Coppinger using?

Simulation analysis

Sensitivity analysis

Scenario analysis

Suppose Coppinger Corp. is evaluating a new capital budgeting project and conducting some basic risk analysis. First, it calculates the projects NPV at various levels for the projects key input variables. Coppinger next calculates the projects 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.

According to this analysis, which variable is the key value driver for the project?

Required return

Price per unit

Variable cost per unit

At the current input-value estimates, does this project have a positive or negative NPV?

Positive NPV

Negative 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: The beginning of the project is less risky than later stages.