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Incorporating Risk Analysis into Capital Budgeting

Methods of Assessing (Stand-alone) Risk. GoalDetermine uncertainty of a project's cash flowsMethodsSensitivity AnalysisChange one input (holding all others constant) and observe its impact on NPVScenario AnalysisChange multiple inputs simultaneously

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Incorporating Risk Analysis into Capital Budgeting

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    1. Incorporating Risk Analysis into Capital Budgeting

    2. Methods of Assessing (Stand-alone) Risk Goal Determine uncertainty of a project’s cash flows Methods Sensitivity Analysis Change one input (holding all others constant) and observe its impact on NPV Scenario Analysis Change multiple inputs simultaneously & allow for a range of outcomes (scenarios) Monte Carlo Simulation Similar to Scenario Analysis, but with thousands of possible scenarios & distribution for each uncertain input (rather than a single value or “point estimate”)

    3. Standard Capital Budgeting Analysis

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