11) Treatment of Uncertainty and Risk in Decision Making

Question 1

Formula to calculate maximum possible change to a PV cash flow before NPV breaks-even (the sensitivity margin)

Answer 1

Sensitivity Margin = NPV / PV (total) of specific cash flow under consideration

Question 2

Expected Value formula

Answer 2

EV = ∑px

x = future outcome, p = probability of future outcome occuring

Question 3

How to quickly calculate Expected Value of a production level where the same outcome occurs at more than one demand level?

Answer 3

For each demand level with the same outcome but different probability, calculate outcome x (sum of probabilities)

Question 4

Value of information (Perfect or imperfect) Calculate

Answer 4

Expected profit with the information (less) expected profit without the information