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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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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
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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