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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.

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.

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk
Section: Chapter Questions
Problem 13MC
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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. one input variable at a time several input variables together Zeva 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. NPV (Millions of dollars) Base Case NPV Base Case Price -30 -24 -18 -12 -6 0 6 12 18 24 30 CHANGES IN SELLING PRICE (Percent) This curve implies that the project is very sensitive to changes in the price of the product. The project's NPV is likely to become negative if the price for which the product can be sold decreases by
Transcribed Image Text: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. one input variable at a time several input variables together Zeva 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. NPV (Millions of dollars) Base Case NPV Base Case Price -30 -24 -18 -12 -6 0 6 12 18 24 30 CHANGES IN SELLING PRICE (Percent) This curve implies that the project is very sensitive to changes in the price of the product. The project's NPV is likely to become negative if the price for which the product can be sold decreases by
This curve implies that the project is very sensitive to changes in the price of the product. The project's NPV is likely to become negative if the price for which the product can be sold decreases by Along with the sensitivity analysis, Zeva 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 Probability Data for z Probability 0.03 0.06 0.09 Outcome NPV; (P;) 0.4 0.3336 0.3228 0.3121 Pessimistic -$2.31 million 0.50 0.6 0.2643 0.2546 0.2451 Most likely $4.53 million 0.35 0.8 0.2033 0.1949 0.1867 Optimistic $12.11 million 0.15 1.0 0.1515 0.1446 0.1379 Complete the missing information in Zeva's 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.
Transcribed Image Text:This curve implies that the project is very sensitive to changes in the price of the product. The project's NPV is likely to become negative if the price for which the product can be sold decreases by Along with the sensitivity analysis, Zeva 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 Probability Data for z Probability 0.03 0.06 0.09 Outcome NPV; (P;) 0.4 0.3336 0.3228 0.3121 Pessimistic -$2.31 million 0.50 0.6 0.2643 0.2546 0.2451 Most likely $4.53 million 0.35 0.8 0.2033 0.1949 0.1867 Optimistic $12.11 million 0.15 1.0 0.1515 0.1446 0.1379 Complete the missing information in Zeva's 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.
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