chap008 - Chapter 8 RISK ANALYSIS, REAL OPTIONS, AND...

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Chapter 8 RISK ANALYSIS, REAL OPTIONS, AND CAPITAL BUDGETING SLIDES CHAPTER ORGANIZATION 8.1 Sensitivity Analysis, Scenario Analysis, and Break-Even Analysis Sensitivity Analysis and Scenario Analysis Break-Even Analysis 8.1 Key Concepts and Skills 8.2 Chapter Outline 8.3 Sensitivity, Scenario, and Break-Even 8.4 Example: Stewart Pharmaceuticals 8.5 NPV Following Successful Test 8.6 NPV Following Unsuccessful Test 8.7 Decision to Test 8.8 Sensitivity Analysis: Stewart 8.9 Scenario Analysis: Stewart 8.10 Break-Even Analysis 8.11 Break-Even Analysis: Stewart 8.12 Break-Even Analysis: Stewart 8.13 Break-Even Revenue: Stewart 8.14 Break-Even Analysis: P BE 8.15 Monte Carlo Simulation 8.16 Monte Carlo Simulation 8.17 Monte Carlo Simulation 8.18 Real Options 8.19 Real Options 8.20 Discounted CF and Options 8.21 The Option to Abandon: Example 8.22 The Option to Abandon: Example 8.23 The Option to Abandon: Example 8.24 The Option to Abandon: Example 8.25 Valuing the Option to Abandon 8.26 The Option to Delay: Example 8.27 Decision Trees 8.28 Example of a Decision Tree 8.29 Decision Tree for Stewart 8.30 Quick Quiz

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A-112 CHAPTER 8 8.2 Monte Carlo Simulation 8.3 Real Options The Option to Expand The Option to Abandon Timing Options 8.4 Decision Trees ANNOTATED CHAPTER OUTLINE Slide 8.0 Chapter 9 Title Slide Slide 8.1 Key Concepts and Skills Slide 8.2 Chapter Outline 8.1. Sensitivity Analysis, Scenario Analysis, and Break-Even Analysis Slide 8.3 Sensitivity, Scenario, and Break-Even Computing an NPV is putting a market value on uncertain future cash flows. Projecting the future involves the potential for error. Major error sources are biases and omissions. There are two main reasons for positive NPVs: (1) we have constructed a good project or (2) we have done a bad job of estimating NPV. Similarly, a negative computed NPV might be reflective of a bad project or of a bad job of estimating NPV. Estimated cash flows are expectations of averages of possible cash flows, not exact figures (although if an exact figure were available, you would use it). Forecasting risk – the danger of making a bad (value destroying) decision as a result of errors in projected cash flows. This risk is reduced if we systematically investigate common problem areas. The first and best guard against forecasting risk is to keep in mind that positive NPVs are economic rarities in competitive markets. In other words, for a project to have a positive NPV, it must have some competitive edge – be first, be best, be the only. Keep in mind the economic axiom that in a competitive market excess profits (the source of positive NPVs) are zero. Lecture Tip: Perhaps the single largest source of positive NPVs is the economic concept of monopoly rents – positive profits that occur
CHAPTER 8 A-113 from being the only one able or allowed to do something. Monopoly rents are often associated with patent rights and

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This note was uploaded on 12/21/2011 for the course NIKA 101 taught by Professor Temur during the Spring '11 term at Acton School of Business.

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chap008 - Chapter 8 RISK ANALYSIS, REAL OPTIONS, AND...

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