PM Proj Final - CashFlowEstimationandits EffectonROI By...

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    Cash Flow Estimation and its  Effect on ROI By Akhil Das Anshul Singhal Mayank Jaswal
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Content Introduction Risk Type of Risk Significance Effect of Inflation on Cash Flows Methods of Measuring Uncertainty Hiller’s Model Decision Tree Analysis Sensitivity Analysis Monte Carlo ROI Significance The Base Case Sensitivity Analysis Pros and Cons Rate of Return
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INTRODUCTION What’s uncertainty? Definition The chance, that an investment's actual return will be different  than expected return.  Example a U.S. Treasury bond is considered to be one of the safest (risk- free) investments and, when compared to a corporate bond,  provides a lower rate of return. The reason for this is that a  corporation is much more likely to go bankrupt than the U.S.  government. Because the risk of investing in a corporate bond is  higher, investors are offered a higher rate of return. 
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Contd… Uncertainty itself can affect the economy on both  the micro and macro level Micro Level Example- Consumption may fall on the threat of a recession  as individuals refrain from purchasing new cars, computers  and other non-essentials.  Macro Level Example- Uncertainty is magnified if the countries at war are  major suppliers or consumers of goods. 
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Type of Risks Generally there are 3 type of relevant risks Stand Alone Risk Corporate Risk Market Risk
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Stand Alone Risk The project’s risk if it were the firm’s only asset and there were no  Shareholders Ignores both firm and shareholder  diversification. Measured by the  σ  or CV of NPV, IRR, or MIRR.
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Corporate Risk Reflects the project’s effect  on corporate earnings  stability Considers firm’s other assets  (diversification within firm) Depends on: project’s  σ , and  its correlation, r, with returns  on firm’s other assets. Measured by the project’s  corporate beta.
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Reflects the project’s effect on a well diversified stock  portfolio. Takes account of stockholders’ other assets. Depends on project’s    σ and correlation with the stock  market.
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PM Proj Final - CashFlowEstimationandits EffectonROI By...

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