BU393 Chapter Notes - Chapter 9: Scenario Analysis, Sensitivity Analysis, Decision Tree Learning
Document Summary
Chapter 9 risk analysis, real options, and capital budgeting. Decision trees a graphical representation of alternative sequential decisions and the possible outcomes of those decisions. One makes decisions in reverse order with decision trees. Sensitivity analysis examines how sensitive a particular npv calculation is to changes in underlying assumptions. Revenue estimates depend on three assumptions: market share, size of jet engine market, price per engine. Financial analysts frequently divide costs into variable and fixed costs. Sensitivity analysis calls for an npv calculation for all three possibilities of a single variable: pessimistic, expected, and optimistic. Sensitivity analysis shows where more information is needed. Sensitivity analysis may unwittingly increase the false sense of security among managers. Sensitivity analysis treats each variable in isolation, when, in reality, the different variables are likely to be related. Managers frequently perform scenario analysis a variant of sensitivity analysis examines a number of different likely scenarios, where each scenario involves a confluence of factors.
