Chapter 7: Project appraisal and risk

Question 1

Joint probability

Answer 1

The probability of two risky outcomes occurring at the same time and is calculated as the probability of one outcome multiplied by the probability of the other.

Question 2

Risk

Answer 2

: Arises where there are several possible outcomes and, based on past relevant experience, probabilities can be assigned to the possible outcomes

Question 2

Sensitivity analysis:

Answer 2

A key method of analysing the uncertainty surrounding a capital expenditure project and enables an assessment to be made of how responsive the project’s NPV is to changes in a single variable that affects a project’s NPV.

Question 3

Uncertainty

Answer 3

: Arises where there are several possible outcomes and no information (eg experience) upon which to create probabilities so the degree of uncertainty cannot be quantified.