Sensitivity, scenario, break-even

Sensitivity, scenario, break-even

1. 1. A tornado chart helps you identify:

   The probability that NPV is positiveWhich inputs the project NPV is most sensitive toCorrelations between inputsThe optimal capital structure

2. 2. Worst/base/best scenarios produce NPVs of -$25M, +$40M, +$150M with probabilities 0.25/0.50/0.25. What is the expected NPV? Answer in $M.

   $M

3. 3. Which limitation is unique to scenario analysis (vs tornado charts)?

   It ignores correlations between inputsIt collapses a continuous distribution of outcomes into a few discrete pointsIt requires a discount rateIt cannot find break-even values

4. 4. Which patterns should make you reconsider a project even though base-case NPV is positive?

   Knife-edge NPV that swings from +$20M to −$20M with ±5% input changesBreak-even revenue growth that's far above the historical sector growth rateIRR comfortably above cost of capitalDiscount rate just barely above the IRR