View source for Risk Analysis and Assessment Techniques

[[NPV]], [[NPV(2)]], IRR

You can use [[NPV]] with the [[Monte Carlo Method]] 
1. identify the factors that are uncertain (Raw mat costs)
2. Estimate the range and likelihood of the occurrence (raw mat costs likely to be between $20-$40 with 50% change of being $20 and 10% of being $40)
3. Select at randon from the distribution of values for each factor and combine them to generate the [[NPV]]
4. Repeat many times to see what results you get

Knowing the shapes of possible NPV distribution helps decision makers assess the expected NPV of competeing projects
.................................XX.......|ZZZ
...............................X....X...Z|.......Z
.............................X.......XZ |............Z
............................X____Z__|_X________Z_____________
MINUS.............................NEUTRAL.......................POSITIVE 

Decision Trees and Risk Analysis
Combine the decision tree with the distributions See Hertz Thomas p 543

Other references
http://www.mindtools.com/pages/article/newTED_04.htm
http://en.wikipedia.org/wiki/Decision_tree

Limitations of Risk Analysis
Can be wrongly interpreted as precise
Has it been undertaken with attention to detail
Models can be overrelaint on the past
Difficulty in incorporating soft factors
Perceived risk is an individual perception


Risk Indices
Business Envrionment Rick Indicators - BERI or EIU

Limitations of Rick Indices
* Good for macro insignts not micro firm
* Assumes we can make judgements on the future based upon the past

[[Category:Finance]]