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

The procedure in which a set of key elements affecting the expected value are changed to study the effect on the expected value is calledscenario analysis.

Diana 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.

$-20$

$-15$

$-10$

$-5$

$0$

$5$

$10$

$15$

$20$

NPV $($Millions of dollars$)$

CHANGES IN UNITS SOLD $($Percent$)$

Base Case NPV

Base Case Units Sold

This curve implies that the project is very sensitive to changes in units sold. The project$$s NPV is likely to become negative if the number of units sold decreases by$5\%.$

Along with the sensitivity analysis, Diana 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 NPVj

Probability $($Pj

$)$

Pessimistic $$$$3\mathrm{.}50$ million $0\mathrm{.}20$

Most likely $$5\mathrm{.}62$ million $0\mathrm{.}45$

Optimistic $$11\mathrm{.}34$ million $0\mathrm{.}35$

Complete the missing information in Diana$$s report:

The expected net present value of the project is$$5\mathrm{.}80$ million $.$

Standard deviation of the net present value $($the NPV of the project is likely to vary by$)$ million.