FIN-3403 Lecture Notes - Lecture 11: Scenario Analysis, Net Present Value
Document Summary
Financial management of the firm - chapter 11 notes. Forecasting risk - the danger of making a bad (value destroying) decision because of errors in projected cash ows. You will calculate the npv of a project, implement the project and then have a bad output. Sensitivity analysis - the process of looking at a particular variable that you forecast (i. e. , how many units of an item will you sell each year, how risky is it that your forecast is incorrect?) Gives you a good idea of which variables are or are not important. Breakeven analysis - how bad does the individual variable have to get before the npv breaks even and hits 0. Scenario analysis - you look at scenarios of outcomes for the entire project in the future. Simulation analysis - most complex, depends on how good you are at creating inputs to a simulation.
