Page 118 - 5.2 i. Manac Finance ITC Summarised Notes
P. 118
CAPITAL INVESTMENT APPRAISAL
Uncertainty
• Cannot be measured (there is not enough information to
assigned a probability).
Methods to allow for project uncertainty include:
- Comparing payback periods (shorter pay back periods = less risk)
- Increasing the discount rate above the WACC for riskier projects
- Ignoring project results beyond a certain period (e.g. 5 years)
- Using sensitivity analysis (next slide), simulation (a model is
experimented on and the results of various alternatives are
examined), Monte Carlo analysis (simulation based on random
computer generated numbers).
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