311 ch11 - Capital Budgeting and Risk Chapter 11 Risk...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Capital Budgeting and Risk Chapter 11
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Risk Project risk The risk that a project performs below expectations Some of the risk can be diversified away Beta risk Depends on the risk of the project relative to the market- portfolio Beta risk cannot be diversified away Capital asset pricing model ( CAPM ) Used to estimate risk-adjusted discount rates for capital budgeting
Background image of page 2
Adjusting for Total Project Risk NPV-Payback approach Simulation approach Sensitivity analysis Scenario analysis Risk-adjusted discount rate approach Certainty equivalent approach
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
NPV-Payback Approach A project must have a positive NPV and a payback of less than a critical number of years to be acceptable
Background image of page 4
Simulation Approach Estimate the probability distribution of each element which influences the CFs of a project Elements Calculate the NPV using randomly chosen numerical values for the elements Repeat the process until a probability distribution of the NPV can be estimated NINV Cost of capital Number of units sold Unit production costs Project life Unit selling cost
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/08/2008 for the course FINANCE fin taught by Professor Bradley during the Spring '08 term at Clemson.

Page1 / 17

311 ch11 - Capital Budgeting and Risk Chapter 11 Risk...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online