6. Sensitivity and scenario analysis

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

Suppose you are using the scenario analysis technique to evaluate project risk. You would change_____________ in the model to evaluate the effect of the input factors on the expected value.

Paloma 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.

03691215NPV (Millions of dollars)COST OF CAPITAL (Percent)Base Case NPVBase Case Cost of Capital

This curve implies that the project is not very sensitive to changes in cost of capital. The projects NPV is likely to_______________ if the cost of capital increases to 15%.

Along with the sensitivity analysis, Paloma 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	NPVjNPV	Probability (Pj)
Pessimistic	$2.31 million	0.50
Most likely	$4.53 million	0.35
Optimistic	$12.11 million	0.15

Complete the missing information in Palomas 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.

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