Table Sensitivity Analysis

Project A Project B

Initial Investment $10,000 $10,000

Optimistic Most likely Pessimistic Range

Annual Cash Inflows $ 8,000 $10,000 5,000 5,000

3,000 1,000

Optimistic Most likely Pessimistic Range

Net Present Values

and pessimistic (worst case) approach. This can be illustrated using Table 14-19. Both Projects A and B require the same initial investment of $10,000, with a cost of capital of 10%, and with expected five-year annual cash inflows of $5,000/year. The range for Project A's NPV is substantially less than that of Project B, thus implying that Project A is less risky. A risk lover might select Project B because of the potential reward of $27,908, whereas a risk avoider would select Project A, which offers perhaps no chance for loss.

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Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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