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 reestimating 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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 Spring '07
 MEJIAS

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