Chapter 11-Project Analysis and Evaluation

breakeven analysis

-tool for analyzing relationship between sales volume and profitability -how bad do sales have to get before we begin to lose money? -how bad does variable have to be before i have NPV of 0 -find the lowest return you can have before you are in the negatives

simulation analysis

combination of scenario and sensitivity analysis -garbage in, garbage out -for every variable-create distribution -biggest downfall: create a confidence level where none is warranted

sensitivity analysis

investigation of what happens to NPV when only one variable is changed -useful in pinpointing which variables deserve the most attention -sees how sensitive NPV is to a particular variable -useful for pointing out where forecasting errors will do most damage, but it doesn't tell us what to do about possible errors -"how many units will i sell before worst case scenario? -aka how bad until NPV=0

scenario analysis

the determination of what happens to NPV estimates when we ask what-if questions for entire project (not only specific variables) -Finite number of possible outcomes -best, expected, and worst case scenario -indicates maximum possible loss

forecasting risk

the possibility that errors in projected cash flows will lead to incorrect decisions "what is it about this project/investment that leads to a positive NPV?" -keep in mind: degree of competition in the market & potential competition; danger of making a bad (value destroying) decision because of errors in projected cash flows