E421-10 - CHAPTER 10 DEALING WITH UNCERTAINTY RISK Risk and...

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CHAPTER 10 DEALING WITH UNCERTAINTY
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RISK Risk and uncertainty are similar in that they both present the problem of not knowing what future conditions will be Risk offers estimates of probabilities for possible outcomes Uncertainty does not provide estimates of probabilities for possible outcomes This book treats them as interchangeable
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FOUR MAJOR SOURCES OF UNCERTAINTY 1. Possible inaccuracy of cash-flow estimates used in the study 2. Type of business relative to the future health of the economy 3. Type of physical plant and equipment involved 4. Length of study period
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POSSIBLE INACCURACY OF CASH-FLOW ESTIMATES How much source information is available How dependable is the source information Uncertainty in capital investment requirements is often reflected as a contingency above actual cost of plant and equipment
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TYPE OF BUSINESS INVOLVED RELATIVE TO HEALTH OF ECONOMY Some businesses will typically be more at risk of declining with when there is a general decline in the economy -- when the economy has gone into recession
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TYPE OF PHYSICAL PLANT AND EQUIPMENT INVOLVED Some types of structures and equipment have definite economic lives and market values – they may be used in a multitude of settings. Other dwellings and equipment, being made for very specific and singular functions, may have little or no resale value
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LENGTH OF STUDY PERIOD The longer the study period, the greater the level of uncertainty of a capital investment
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SENSITIVITY ANALYSIS Sensitivity
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This note was uploaded on 10/28/2009 for the course ENGM 400 taught by Professor Blank during the Spring '09 term at American University of Beirut.

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E421-10 - CHAPTER 10 DEALING WITH UNCERTAINTY RISK Risk and...

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