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Investment Decision-Making

Investment Decision-Making. Accounting for Risk. Sensitivity Analysis. Example: Questions. Example: Solution. Example: Solution (cont.). Example: Solution (cont.). Example: Solution (cont.). Example: Solution (cont.). Problems with Sensitivity Analysis. No decision criteria: What to do?

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Investment Decision-Making

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  1. Investment Decision-Making Accounting for Risk

  2. Sensitivity Analysis

  3. Example: Questions

  4. Example: Solution

  5. Example: Solution (cont.)

  6. Example: Solution (cont.)

  7. Example: Solution (cont.)

  8. Example: Solution (cont.)

  9. Problems with Sensitivity Analysis • No decision criteria: What to do? • Only one variable at a time is analyzed • Solution: scenario analysis (What if? Analysis) on spreadsheet. (* see http://office.microsoft.com/en-us/excel-help/use-the-scenario-manager-feature-in-excel-HA001199652.aspx?CTT=5&origin=HA001199648 ) Alternative approach: Expected Net Present Value (ENPV) Analysis

  10. Example: Expected Net Present Value (ENPV)

  11. Example: ENPV (cont.)

  12. Example: Solution

  13. Example: Solution (cont.)

  14. Problems with ENPV Analysis

  15. Example: ENPV Ignore (past) Fixed Costs

  16. Example: ENPV (cont.) Include (forgone) Opportunity Costs

  17. Example: ENPV (solution)

  18. Example: ENPV (solution)

  19. Example: ENPV solution (cont.)

  20. When businesses (or investors) take on more risk, they generally require a higher rate of return – meaning that the discount rate used for evaluating ENPV must be higher when the risk is greater. Risk-Adjusted Discount Rate (RADR)

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