Question
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
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 | ||
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Generates results that are calculated under different scenarios based on formulaic assumptions by representing them in the form of frequency distributions |
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Measures the effect on NPV estimates when key factors that affect NPV change in different situations |
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Measures the percentage change in a projects NPV when a given variable is changed and all other NPV-drivers are held at their expected values |
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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 | |
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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?
Variable cost per unit
Required return
Price 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. In decision tree analysis, the discount rate as you move through the decision tree.
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