BUSF_A01.qxd

Chapter 6 • Risk in investment appraisal As we have seen, a very modest attempt at reality causes complications. We can well ima ...

Expected value Possible outcome NPV Probability (p) NPV×p ££ C −19,672 0.04 − 787 F −15,881 0.10 −1,588 I −12,090 0.06 − 725 B − ...

Chapter 6 • Risk in investment appraisal A business has two investment projects (A and B) in each of which it can invest either ...

Systematic and specific risk If, however, half is invested in each project then there are four possible outcomes: 1 A(i) and B(i ...

Chapter 6 • Risk in investment appraisal way that Example 6.4 suggests, because specific risk factors for separate projects are ...

Utility theory Figure 6.2 Utility of going away on holiday for a particular individual All points along the curve UU represent c ...

Chapter 6 • Risk in investment appraisal devoted to paying for a holiday (leaving 0P to save or spend other than on holidays), 0 ...

6.7 Attitudes to risk and expected value can see from Figure 6.4 that our individual derives great utility from increases in day ...

Chapter 6 • Risk in investment appraisal Figure 6.5 Graph of the utility of wealth against wealth for a particular risk- averse ...

Attitudes to risk and expected value Figure 6.6 shows the general shapes of the utility curves of (a) a risk-averse investor, (b ...

Chapter 6 • Risk in investment appraisal There may be some individuals in the world who are risk-lovers. Such an indivi- dual mi ...

Attitudes to risk and expected value Figure 6.7 Graph of the probabilities of the NPV for two projects each having equal expecte ...

Chapter 6 •Risk in investment appraisal 6.8 Particular risks associated with making investments overseas In principle, investing ...

Summary Risk lRisk is of vital concern to decision makers. Sensitivity analysis (SA) lIn the context of an NPV appraisal, SA inv ...

Chapter 6 • Risk in investment appraisal lProblems of EV: lThe averaging process hides information, e.g. on the NPV and probabil ...

Problems 6.1 What are the limitations of the results of a sensitivity analysis such as the one carried out in Example 6.1 (Green ...

Chapter 6 • Risk in investment appraisal Easton Ltd’s cost of capital is 6 per cent p.a. (a) Calculate the NPV for each of the t ...

Problems Project Initial outlay NPV Probability £ million £ million A 6.0 3.0 (positive) 0.5 1.5 (negative) 0.5 B 2.0 1.0 (posit ...

Chapter 6 • Risk in investment appraisal volume of sales were to be at the higher level, 20X2 sales would be estimated at 12,000 ...

Problems Estimates of the various factors relating to Kane, assuming that it continues to be a subsidiary of Focus, have been ma ...