Ross Westerfield Jordan Chapter 11 Fundamentals of TMP Corporate Finance TAM6AmD走OITION Project Analysis and Evaluation 0
0 Chapter 11 Project Analysis and Evaluation
Chapter Outline Evaluating NPV Estimates n Scenario and Simulation Analyses Break-Even Analysis Operating Leverage Capital Rationing
1 Chapter Outline n Evaluating NPV Estimates n Scenario and Simulation Analyses n Break-Even Analysis n Operating Leverage n Capital Rationing
Key Concepts and Skills Understand forecasting risk and sources of value Understand and be able to do scenario and sensitivity analysis Understand the various forms of break-even analysis Understand operating leverage ■ Understand capital rationing
2 Key Concepts and Skills n Understand forecasting risk and sources of value n Understand and be able to do scenario and sensitivity analysis n Understand the various forms of break-even analysis n Understand operating leverage n Understand capital rationing
Evaluating NPV Estimates NPV estimates are just that-estimates A positive NPV is a good start-now we need to take a closer look Forecasting risk-how sensitive is our NPV to changes in the cash flow estimates;the more sensitive,the greater the forecasting risk Sources of value why does this project create value?
3 Evaluating NPV Estimates n NPV estimates are just that – estimates n A positive NPV is a good start – now we need to take a closer look q Forecasting risk – how sensitive is our NPV to changes in the cash flow estimates; the more sensitive, the greater the forecasting risk q Sources of value – why does this project create value?
Scenario Analysis What happens to the NPV under different cash flows scenarios? At the very least look at: Best case-high revenues,low costs Worst case-low revenues,high costs Measure of the range of possible outcomes Best case and worst case are not necessarily probable,but they can still be possible
4 Scenario Analysis n What happens to the NPV under different cash flows scenarios? n At the very least look at: q Best case – high revenues, low costs q Worst case – low revenues, high costs q Measure of the range of possible outcomes n Best case and worst case are not necessarily probable, but they can still be possible