Week 4 Presentation WIP

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Nov 24, 2024

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Hello Class, My name is Rafael Martinez Aquino and in today’s presentation I will be talking about the qualitative and quantitative steps in conducting a sensitivity analysis and how a project’s risk can be incorporated into capital budgeting analysis. NEXT SLIDE (Introduction) https://www.loom.com/share/1e98071d60a34f85b6ef866b58b5bdf5?sid=dc76b48c- b9c2-4102-9eea-6287fda07f3a
NEXT SLIDE (Qualitative Steps) The first step in the procedure is to describe the issue, which includes choosing the particular variables that will be assessed as well as the sensitivity analysis's objectives. Cost, production rate, and demand are examples of factors that can be entered, whereas profit, output quality, and market share are examples of factors that can be output. Identify the Assumptions: The assumptions made about the system must be established at this stage, together with any extra constraints that might have an impact on the results, such as the range of values for the input variables. Determine the Model: This step involves selecting the model to be used and evaluating the system's sensitivity to the different factors to see if it satisfies the requirements. This entails deciding on the type of model to use (such as a linear, non- linear, or Monte Carlo model) as well as the method for analyzing each variable. Gather Data: collect the data for the analysis at this point and assess whether or not it is representative of the system. This includes any additional information that may be relevant, along with data relating to the variables that are input and output. Perform a Data Analysis: The data must then be analyzed in order to determine how susceptible the system is to the factors. This entails determining which variables have the most impact on the system and looking for any connections that could exist between the variables.
NEXT SLIDE (Quantitative Steps) Calculate the Baseline: The initial step in this method is to ascertain the system's outcome when it is not influenced by any external variables. This not only makes it possible to compare how sensitive the system is to the baseline, but it also offers a baseline that can be used for additional research. Determine the Sensitivity: At this point, you will use the calculation that was previously given to ascertain the sensitivity of the system to each of the input variables. In this stage, you will first decide the possible values for each variable before computing the effect that each variable has on the outcome. Create a Graph: in order to comprehend the system's sensitivity to each of the input variables. This will allow comparing the system's sensitivity to several variables easily and provide a gauge of the system's overall sensitivity. You are now in charge of examining the results of the sensitivity analysis to determine the impact that each variable has on the system. Understanding each variable's impact on the system, its direction and magnitude, as well as how it interacts with other variables is necessary to achieve this. Make Adjustments as necessary to the system in order to optimize the desired output. Examples of what this might entail include changing the approach taken to determine the system's sensitivity by either widening or narrowing the range of values that can be assigned to variables.
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NEXT SLIDE (Risk Incorporation) Risk is incorporated into capital budgeting analysis by estimating a project's rate of return. Determining the overall rate of return anticipated from the project and selecting the most profitable project are both helpful. Risk-Adjusted Discount Rate: This strategy involves adjusting the discount rate to better represent the level of risk associated with the project. A higher discount rate denotes a higher amount of risk, while a lower discount rate represents a smaller degree of risk. Analysis of Sensitivity: Using a variety of conceivable scenarios, this technique simulates a number of different project outcomes. As a result, the analyst is able to ascertain the outcome that is most likely to occur and assess how different levels of risk affect the projected return on investment. Monte Carlo Simulation: This strategy uses a computer simulation to examine the impact that various levels of risk have on the projected financial success of a project. A variety of possibilities will be shown by the simulation, along with the associated probabilities for each of those events. Real Options Analysis uses a financial option pricing model to assess the impact of various levels of risk on the anticipated return of a project. The research takes into account the project's flexibility, which enables the analyst to assess the project's value in a number of scenarios with different levels of risk.
NEXT SLIDE (Conclusion)

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