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Unformatted text preview: also have higher
market risk. And a project's stand-alone risk is easier to measure than market risk. We can get an idea of
a project's stand-alone risk by evaluating the project's future cash flows using statistical measures,
sensitivity analysis, and simulation analysis. 2. Measurement of project risk
"Take calculated risks. That is quite different from being rash."
–- George S. Patton, 1944. A. Statistical measures of cash flow risk We will look at three statistical measures used to evaluate the risk associated with a project's possible
outcomes: the range, the standard deviation, and the coefficient of variation. Let's demonstrate each
using new products as examples. Based on experience with our company's current product lines and the
market research for new Product A, we can estimate that it may generate one of three different cash
flows in its first year, depending on economic conditions: Capital budgeting & risk, a reading prepared by Pamela Peterson Drake 3 Economic
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- Spring '07