Lesson 2: Project Analysis

Question 1

Break even analysis

Answer 1

calculate the value at which NPV of the project = 0

Question 2

Sensitivity Analysis

Answer 2

breaks NPV into its component assumption and shows how NPV varies as the underlying assumption change (assuming other parameters at the baseline)

Question 3

Scenario analysis

Answer 3

calculate NPVs for various scenarios -> vary 2 parameters and leaving other parameters unchanged if they are uncorrelated

Question 4

2 types of scenario analysis

Answer 4

• 4 Risk measures
• Coherent risk measurement

Question 5

4 Risk measure

Answer 5

Variance, Semi - variance, Tail value at Risk, Value at Risk

Question 6

Coherent risk measure

Answer 6

Translation invariance: g(X+c)=g(X) + c
-> c constant gain or loss generates no risk beyond its amount
Positive homogenity: g(cX) = cg(X)
-> expressing random variable in different currency should not affect the risk measure
Subadditivity: g(X + Y) ≤ g(X) + g(Y)
-> combining losses may result in diversification and reducing the total risk measure
Monotonicity: g(X) ≤ g(Y) if P(X≤Y) = 1
-> X has no more risk than Y

Question 7

Free cash flow

Answer 7

cash amounts generated by the project itself (not inclide non-cash accounting (depriciation), financing used to support the project)

Question 8

cost of capital

Answer 8

measures the cost that a business incurs to finance its operations