Class 10&11&12&13 - Part 3

Class 10&11&12&13 - Part 3 - CapitalBudgeting...

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Capital Budgeting Project Analysis and Evaluation
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Is a positive NPV the happy  ending? Ø No – it is rather a happy start! Ø NPV estimates are nothing but estimates Ø A closer look at the estimation is definitely  needed to minimize forecasting risk § Forecasting risk – how sensitive is the project’s  NPV to changes in the cash flow estimates?  The more sensitive it is, the greater the  forecasting risk…
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Scenario Analysis Ø What happens to the NPV under different  cash flow scenarios? Ø At the very least, look at: § Best case – high revenues, low costs § Worst case – low revenues, high costs Ø Best case and worst case are not  necessarily probable, but they can still be  possible and they clearly give an idea  about the upper and lower bounds for the 
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Scenario Analysis – Example  Scenario Net Income Cash Flow NPV IRR Base case 19,800 59,800 15,567 15.1% Worst Case -15,510 24,490 -111,719 -14.4% Best Case 59,730 99,730 159,504 40.9%
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Sensitivity Analysis Ø What happens to NPV when we change one  variable at a time? Ø How sensitive is our NPV estimate to  changes in specific variables? Ø
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This note was uploaded on 01/29/2012 for the course BUSI 408 taught by Professor Croce during the Summer '08 term at UNC.

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Class 10&11&12&13 - Part 3 - CapitalBudgeting...

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