Simulate cash flows using the model and probabilities

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Unformatted text preview: s. 2. Specifying probabilities for each of the underlying variables, i.e. specifying a range for e.g. the expected market share as well as all other variables in the model 3. Simulate cash flows using the model and probabilities assumed above and calculate the net present value 6.5 Why projects have positive NPV In addition to performing a careful analysis of the investment project's sensitivity to the underlying assumptions, one should always strive to understand why the project earns economic rent and whether the rents can be sustained. Economic rents are profits than more than cover the cost of capital. Economic rents only occur if one has - Better product Lower costs Another competitive edge Even with a competitive edge one should not assume that other firms will watch passively. Rather one should try to identify: - How long can the competitive edge be sustained? What will happen to profits when the edge disappears? How will rivals react to my move in the meantime? o Will they cut prices? o...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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