Question

4. Sensitivity and scenario analysis Different techniques for analyzing project risk require different input variables and assumptions. Suppose you are using the scenario analysis technique to evaluate project risk. You would change in the model to evaluate the effect of the input factors on the expected value. Tanya 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. NPV (Millions of dollars) ---- Base Case NPV -20 -15 -10 Base Case Units Sold -5 0 5 10 15 20 CHANGE IN UNITS SOLD (Percent) 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

Answer 1

1.
Multiple variables

2.
10%

3.
=0.20*(-3.50)+0.45*5.62+0.35*11.34
=5.79800

4.
=sqrt(0.20*(-3.50-5.79800)^2+0.45*(5.62-5.79800)^2+0.35*(11.34-5.79800)^2)
=5.29666

5.
=5.79800/5.29666
=1.09465

6.
=0.1379 or 13.79%