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    Project Anlysis

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    jatinder414
    Risk is when the probabilities of outcomes are known, while uncertainty is when probabilities are unknown. Risk can be accounted for in project analysis by adjusting the discount rate or using the certainty equivalent method. Sensitivity analysis and scenario analysis are also used to evaluate projects under risk. Simulation allows understanding how changing variables may impact a system.

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    Project Anlysis

    Uploaded by

    jatinder414
    16 views20 pages
    Risk is when the probabilities of outcomes are known, while uncertainty is when probabilities are unknown. Risk can be accounted for in project analysis by adjusting the discount rate or using the certainty equivalent method. Sensitivity analysis and scenario analysis are also used to evaluate projects under risk. Simulation allows understanding how changing variables may impact a system.

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    Risk is when the probabilities of outcomes are known, while uncertainty is when probabilities are unknown. Risk can be accounted for in project analysis by adjusting the discount rate or using the certainty equivalent method. Sensitivity analysis and scenario analysis are also used to evaluate projects under risk. Simulation allows understanding how changing variables may impact a system.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    16 views20 pages

    Project Anlysis

    Uploaded by

    jatinder414
    Risk is when the probabilities of outcomes are known, while uncertainty is when probabilities are unknown. Risk can be accounted for in project analysis by adjusting the discount rate or using the certainty equivalent method. Sensitivity analysis and scenario analysis are also used to evaluate projects under risk. Simulation allows understanding how changing variables may impact a system.

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    of 20

    y The difference between risk

    and uncertainty

    Risk - when the decision maker knows the probability of each and every state of nature and thus each and every outcome. An expected value of each alternative action can be determined

    Uncertainty - when a decision maker has information that is not complete and therefore cannot determine the expected value of each alternative

    Project Analysis Under Risk

    Incorporating risk into project analysis through adjustments to the discount rate, and by the certainty equivalent factor.

    What is Risk?

    yRisk is the variation of future

    expectations around an expected value. Risk is measured as the range of variation around an expected value. Risk and uncertainty are interchangeable words.

    Handling Risk

     Risk may be accounted for by (1) applying a discount rate commensurate with the riskiness of the cash flows, and (2), by using a certainty equivalent factor

    Risk may be accounted for by evaluating the project using sensitivity and breakeven analysis. Risk may be accounted for by evaluating the project under simulated cash flow and discount rate scenarios.

    Analysis Under Risk

    yRisk is the variation in future cash

    flows around a central expected value. yRisk can be accounted for by adjusting the NPV calculation discount rate: there are two methods either the WACC, or the CAPM

    yRisk can also be accommodated

    via the Certainty Equivalent Method. yAll methods require management judgment and experience.

    Simulation

    Simulation is a flexible methodology we can use to analyze the behavior of a present or proposed business activity, new product, manufacturing line or plant expansion, and so on (analysts call this the 'system' under study).

    By performing simulations and analyzing the results, we can gain an understanding of how a present system operates, and what would happen if we changed it -- or we can estimate how a proposed new system would behave

    Often -- but not always -- a simulation deals with uncertainty, in the system itself, or in the world around it.

    Sensitivity Analysis

    A technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions.

    This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond's price.

    Scenario Analysis

    The process of estimating the expected value of a portfolio after a given period of time, assuming specific changes in the values of the portfolio's securities or key factors that would affect security values, such as changes in the interest rate.

    Using a Risky Discount Rate

    yThe structure of the cash flow

    discounting mechanism for risk is:-

    The $ amount used for a risky cash


    flow is the expected dollar value for that time period.
    15

     A risky rate is a discount rate


    calculated to include a risk premium. This rate is known as the RADR, the Risk Adjusted Discount Rate.

    Decision Trees

    yA decision tree is a chronological

    representation of the decision problem. yEach decision tree has two types of nodes; round nodes correspond to the states of nature while square nodes correspond to the decision alternatives.

    Decision Tree Analysis

    yA graphical tool

    for describing (1) the actions available to the decision-maker,

    (2) the events that can occur, and (3) the relationship between the actions and events.

    Competitors price

    Conditional Profit

    Decision Points
    Events

    Our Price
    High

    High (0.5) (0.5) Low

    $60 -$20

    ) Probability Market Competitive Product (0.7)

    High

    $40
    (0.2) (0.8)

    No Competitive Product (0.3) Do not market

    Low Low High

    $10 $100

    $0
    First Decision Point

    Low

    $30
    Second Decision Point

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