Week 4 - Risk Analysis, Real Options And Capital Budgeting Flashcards
Differences between Sensitivity and Scenario Analysis
Scenario analysis involves the evaluation of more than one variable changes rather than a single variable which sensitivity looks at
What is Break-even analysis
How low can sales go before project loses money
Financial Break-even is?
The level of sales volume that generates an NPV of zero or an IRR = opportunity cost of capital
What is accounting Break Even
Level of sales that results in a zero net profit
What is total variable cost formula
Quantity (Q) X cost per unit (v)
Total cost formula
Fixed + variable
What is Average Cost
Total costs/ number of units
This will decrease as number of units increases
What is Marginal Cost
The cost to produce one more unit
Same as variable cost per unit
Formula to calculate market value of a project
M = NPV + Opt
What is Option to Abandon
The value if demand turns out to be lower than expected
What is the option to delay
Has value if the underlying variables are changing with a favourable trend
