Chapter 7 - Project appraisal and risk

Question 1

What are the different risk analysis techniques?

Answer 1

PSC

• Probability analysis
• Simulation
• Conservative forecasting

Question 2

What is the difference between risk and uncertainty?

Answer 2

• Risk is quantifiable and based on past experiences

- Uncertainty is not quantifiable

Question 3

What are the different uncertainty analysis techniques?

Answer 3

• Sensitivity analysis
• Discounted payback
• Scenario planning
• Risk-free rate

Question 4

What are the disadvantages of probability analysis?

Answer 4

• Probabilities are subjective

- Expected value may not be a possible outcome

Question 5

What is conservative forecasting?

Answer 5

Discounting using the risk-free rate

Question 6

What is sensitivity analysis?

Answer 6

The required change in a variable to change the NPV to zero

Question 7

What are the disadvantages of sensitivity analysis?

Answer 7

• It only considers one variable at a time

- No decision rule

Question 8

What is the formula for sensitivity analysis?

Answer 8

NPV of investment / PV of variable

Question 9

What does simulation involve?

Answer 9

Assigning a random number for each variable and finding the standard deviation around the mean

Question 10

What is the ideal amount of inflation when calculation equivalent annual cost?

Answer 10

None