Chapter 11Project Analysis and EvaluationSlide 11 - 1Key Concepts and Skills±Understand forecasting risk±Understand scenario and sensitivity analyses±Understand break-even analysis±Understand operating leverageSlide 11 - 2±NPV EstimatesA positive NPV is a good start. However, NPV estimates depend onprojected future cash flows. If there are errors in those projections, the estimated NPVs can be misleading.±Forecasting RiskForecasting 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 EstimatesSlide 11 - 3±Scenario Analysis●What happens to the NPV under different CF scenarios?At the very least, look at three scenarios:¾Best (or optimistic) case – high revenues, low costs¾Worst (or pessimistic) case – low revenues, high costs¾Base caseBest case and worst case are not necessarily probable, but they can still be possible.What-If Analyses
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