3. Sensitivity and scenario analysis

Different techniques for analyzing project risk require different input variables and assumptions.

Suppose you are using the sensitivity analysis technique to evaluate project risk. You would change __(several input variables at a time/ one input variable at a time) in the model to evaluate the effect of the input factors on the expected value.

Zhi is a risk analyst. She is conducting a sensitivity analysis to evaluate the riskiness of a new project that her company is considering investing in. Her risk analysis report includes the sensitivity curve shown on the graph.

This curve implies that the project is not very sensitive to changes in cost of capital. The projects NPV is likely to __(stay positive/ become negative) if the cost of capital increases to 15%.

Along with the sensitivity analysis, Zhi is including a scenario analysis for the project in her report, giving the probability of the project generating a negative NPV. Her report includes the following information about the scenario analysis:

Data Collected

Outcome	NPVjNPVj	Probability
		(PjPj)
Pessimistic	$-5.62 million	0.35
Most likely	$7.94 million	0.30
Optimistic	$16.45 million	0.35

Probability Data for z

z	0.03	0.06	0.09
0.4	0.3336	0.3228	0.3121
0.6	0.2643	0.2546	0.2451
0.8	0.2033	0.1949	0.1867
1.0	0.1515	0.1446	0.1379

Complete the missing information in Zhis report:

The expected net present value of the project is ______

Standard deviation of the net present value (the NPV of the project is likely to vary by) ____ million. Assuming that probability distribution is normal, the value of z is .

Thus, the project has a ____ chance to generate an NPV of less than $0