ch 11 (Project Analysis)

ch 11 (Project Analysis) - Key Concepts and Skills Chapter...

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Chapter 11 Project Analysis and Evaluation Slide 11 - 1 Key Concepts and Skills ± Understand forecasting risk ± Understand scenario and sensitivity analyses ± Understand break-even analysis ± Understand operating leverage Slide 11 - 2 ± NPV Estimates A positive NPV is a good start. However, NPV estimates depend on projected future cash flows. If there are errors in those projections, the estimated NPVs can be misleading. ± Forecasting Risk Forecasting risk is the possibility that errors in projected cash flows will lead to incorrect decisions. How sensitive is our NPV to changes in the cash flow estimates? The more sensitive, the greater the forecasting risk. Evaluating NPV Estimates Slide 11 - 3 ± Scenario Analysis What happens to the NPV under different CF scenarios? At the very least, look at three scenarios: ¾ Best (or optimistic) case – high revenues, low costs ¾ Worst (or pessimistic) case – low revenues, high costs ¾ Base case Best case and worst case are not necessarily probable, but they can still be possible. What-If Analyses
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