Chapter 6 - Risk and Project Appraisal

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6 Terms

1
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What is Certainty?

Where future outcomes are expected to have one value, return is low e.g Government Bonds

2
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What is risk?

Where the probabilities of the outcome are known and therefore can be quantified

3
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What are the methods of adjusting for risk?

  • Discount Rate

  • Sensitivity Analysis

  • Scenario Analysis

  • Probability Analysis

4
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What is standard deviation?

A statistical measure that quantifies risk associated with investments e.g bonds, stock

5
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What are the advantages of Sensitivity Analysis

  • Provides information on sensitivity of project

  • Indicates areas which can be analysed further

  • Critical factors can be monitored more closely

6
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What are the disadvantages of Sensitivity Analysis?

  • No probabilities are provided

  • Each factor is changed in isolation