6_1Santikian_FBE 421_sp11_

6_1Santikian_FBE 421_sp11_ - FBE 421: Financial Analysis &...

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FBE 421: Financial Lecture 6 Project Risk Analysis
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Introduction Investment decisions take place in a world of uncertain future  outcomes, where there are more things that can happen than  will happen, which makes investment analysis considerably  more complex. Project Risk Analysis Confronts Uncertainty Various approaches are used to analyze and deal with  uncertainty Scenario analysis, breakeven sensitivity analysis, and  Monte Carlo simulation
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Evaluating new investment opportunities: 2 Phases Phase I Analyst tries to envision the  possible outcomes from an  investment Analyst prepares estimates  and forecast Analysis forms the basis for  estimating an expected  value for the investment  along with NPV, IRR, and  other measures of  investment worth Phase II Analyst details underlying  sources of uncertainty. Identify value drivers and  the uncertainty that  characterizes each
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Uncertainty and Investment Analysis Our focus is on project valuation Risk analysis tools also apply to enterprise valuation -  the evaluation of acquisitions of entire firms Although methods allow us to be systematic, the process  of dealing with uncertainty on assumptions inherently  involves judgment Methods allow us to have some discipline but do not  eliminate the inherently subjective part    
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The Earthilizer Example CSM, Inc., is considering an investment in Earthilizer, a new organic  fertilizer made from dairy farm waste Developed by CSM’s ag-division over the past 3 years in response to: growing demand from organic farmers More restrictions on the disposal of cattle manure Initial investment of $580K (250K WC + $330K PPE) Project will be “up and running” by the end of 2010, with first year of  revenues in 2011 CSM financed from internally generated cash flows; project is all-equity- financed Very promising investment opportunity Product has undergone extensive testing Product is wholly organic, and is cheaper than traditional applications
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This note was uploaded on 02/23/2011 for the course FBE 421 taught by Professor Plotts during the Spring '07 term at USC.

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6_1Santikian_FBE 421_sp11_ - FBE 421: Financial Analysis &...

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