IEMS 326 Notes07Scenarios

IEMS 326 Notes07Scenarios - Scenarios and Probability IEMS...

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Scenarios and Probability IEMS 326 Lecture 7
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Scenario Analysis Cashflow projections are uncertain. E.g. sales, cost may differ from projections. Identify some scenarios and recompute NPV. Like break-even or sensitivity analysis, but change multiple variables at once make up multiple scenarios instead of finding one break-even value look at big changes not operating leverage Leads to probabilistic analysis.
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Scenario Analysis: Uses Check robustness of the investment decision. If NPV > 0 in all plausible scenarios , confident. Identify alternate designs for project. E.g. reduce operating leverage to make uncertainty about sales less important. Increase managerial flexibility to avoid or ameliorate bad scenarios. Provide guidelines for managing the project .
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Scenario Analysis: Limitations How to design scenarios? How bad is a pessimistic value ?
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This note was uploaded on 04/07/2008 for the course IEMS 326 taught by Professor Staum during the Winter '07 term at Northwestern.

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IEMS 326 Notes07Scenarios - Scenarios and Probability IEMS...

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