A project is not a black box

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Presentation transcript:

A project is not a black box “What is sought is found”- Sophocles, Oedipus Tyrannus

Project analysis (or understanding what makes a project tick) Sensitivity analysis Scenario analysis Break-even analysis Monte-Carlo analysis Decision Trees

Sensitivity analysis for Jalopy Motor

Break-even analysis for Jalopy Motor $ million $ million 4000 PV inflows Revenues 600 NPV = 0 PV outflows Profit = 0 2000 Costs 200 200 60 200 85 Scooter sales, 000s Scooter sales, 000s ... in terms of present values ... in terms of accounting profit

Monte-Carlo simulation Simulating a project: Step 1 Step 2 Step 3 Model the Specify Select numbers for project probabilities for forecast errors & forecast errors calculate cash flows

Decision trees The electric mop example NPV = -1000 + 250/.10 = +$1500 Invest $1000 for full-scale production q Success (1/2) Don’t invest NPV = 0 l STOP Test (invest $125) NPV = -1000 + 75/.10 = -$250 Failure (1/2) Invest $1000 for full-scale production q q Don’t test Don’t invest STOP STOP NPV = 0