Project Appraisal and Risk Flashcards
What is a risk?
Arises where there are several possible outcomes
Probabilities can be assigned to possible outcomes
What does risk increase?
The variability of a project’s cash flow increases
What is meant by uncertainty?
Arises where there are several possible outcomes and no info upon which to create probabilities
Uncertainty of prohect cash flows?
Increases as the length of a project rises. Short-term cash flows are more certain
What is an expected value?
A weighted average that is calculated using probabilities
What is joint probability?
Probability of two risky outcomes occurring at the same time
Issue with probability analysis?
Unreliable estimates of probabilities
Expected value may not be a possible outcome
Expected values do not consider the range of possible outcomes
What is unreliable estimates of probabilities
Investment opportunities are often one-offs
What are expected value may not be a possible outcome?
Evaluation of investment is more complicated
What are expected values do not consider the range of possible outcomes?
Company’s decision making is influenced by risk appetite
What is similation?
Random numbers assigned to different values of variables to reflect their proability
What is conservative forecasting?
Traditional way of dealing with risk is to reduce estimated project cash inflows to an ultra-safe level
What is sensitivity analysis?
Enables an assessment to made of how responsive NPV is to changes in a single variable
What does NPV depend on?
Selling price
Sales volume
Operating costs
etc
What does sensitivity analyis provide
Which variables a prohect is most sensitive to
