25557 Chapter Notes - Chapter 11: Scenario Analysis, Operating Leverage, Net Present Value
Document Summary
Evaluating and mitigating the risks of a project. Determines how different values of an independent variable affect a particular dependent variable under a given set of assumptions. Conducted if a project appears to be worth executing with a positive npv. Npv is recalculated as each underlying variable is set one at a time at its optimistic or pessimistic value and all other values are as expected. Forces the manager to identify the underlying variables and calculate the consequences of misestimating the variables. Indicates where additional information would be most useful and helps expose appropriate forecasts. Underlying variables are likely to be interrelated, not independent. Scenario analysis - if variables are interrelated, scenario analysis is used to look at different but consistent combination of variables. Analysis of the level of sales at which the project breaks even with a zero npv. A business with high xed costs will have high operating leverage and high business risk, therefore high break-even sales.
