b. Complete Table 1, assuming initially that the project has average risk. Then develop
a new table which shows a sensitivity analysis of NPV to sales quantity, salvage
value, and the cost of capital. Assume that each of these variable can deviate from
its base case, or expected value, by plus or minus 10 percent, 20 percent, and 30
percent. See Table 2 for partial results.
c. sensitivity diagram and discuss the results.
d. What are the primary weaknesses of sensitivity analysis? What are its primary
3. Complete the scenario analysis initiated in Table 3. What is the worst case NPV? The
probabilities of occurrence, to find the project’s expected NPV, standard deviation,
and coefficient of variation.
4. What are the primary advantages and disadvantages of scenario analysis?
6. a. Would the lite orange juice project be classified as high risk, average risk, or low
risk by your analysis thus far? (Hint: Consider the project’s coefficient of variation
of NPV.) What type of risk have you been measuring?
b. What do you think the project’s corporate risk would be, and how could you
c. How would it affect your risk assessment if you were told that the cash flows from
this project were totally uncorrelated with Indian River’s other cash flows? What of