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Chapter 9

Chapter 9 BU393.docx

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S I Li

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BU393 Chapter 9 – Risk Analysis, Real Options, and Capital Budgeting Week 2 Decision Trees -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, Scenario Analysis, and Break-Even Analysis Sensitivity Analysis and Scenario Analysis -Sensitivity analysis – examines how sensitive a particular NPV calculation is to changes in underlying assumptions -Revenue estimates depend on three assumptions: 1. Market share 2. Size of jet engine market 3. 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 informat
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