First calculate the expected return possible outcome

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Unformatted text preview: of the first things we have to consider about our estimates is how sensitive they are to these assumptions. For example, if we only sell two million units instead of three million units in the first year, is the project still profitable? Or, if Congress increases the tax rates, will the project still be attractive? σ2(x) = 0.01240 We can analyze the sensitivity of cash flows to change in the assumptions by Variance = 0.01240 using re-estimating the cash flows for Standard deviation = 0.11136 or 11.136% different scenarios. Sensitivity analysis, also called scenario analysis, is a method of looking at the possible outcomes, given a change in one of the factors in the analysis. Sometimes we refer to this as "what if" analysis -- "what if this changes", "what if that changes", ..., and so on. Tools that can be used to evaluate total risk Sensitivity analysis (also called scenario analysis) is the examination of possible cash flows and returns on an investment when one uncertain element is altered ("what if?&qu...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.

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