would you agree or disagree?

timer Asked: Apr 25th, 2018

Question Description

Within capital budgeting exist three risks, stand-alone risk, corporate risk, and market risk. Project risk is when only one asset is involved and no shareholders were available to split the costs. Corporate risks are effected specifically through earning stability in this instance. Market risk refers to risk as it relates to stock portfolio. Scenario analysis examines worse case, most likely, and best case with a range of several outcomes. Simulation analysis is a computerized version of said scenario analysis utilizing continuous probability distributions and the variables are selected by the computer which are repeated many times (Noman, 2010). Decisions trees are used to analyze capital budgeting risks as well through outlining several different scenarios over the life of a project, assigning probabilities, then calculating expected profitability based on either cash flow or net income useful for dealing with fluctuating prices. An advantage offered by simulation analysis is that you are provided with multiple outcomes at the effort of a computerized software, and not to much physical effort. One offered by a decision tree is that you could potentially measure consequences of alternative scenarios. The decision tree would be appropriate in considering purchase of an asset which would provide for company operations over the next 10 years with PVs foretasted by the company based on most likely future cash flows (J. Bailes, J. Nielsen, 2001). What you would learn is expected value of assets at the end of the life of that project. The simulation analysis would be appropriate when examining a wide range of scenarios and potential outcomes, in order to save time. What you would expected to learn are the scenario which would provide the most opportunity for the business and try to mimic that same scenario.

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