Analyzing project risks by making mechanical trial and error changes to forecast values of selected variables.Analyzing the risks of investment projects, by changing the values of forecasted variables.
Finding the values of particular variables which give the project a Breakeven NPV of zero.
Upon completion of this chapter you should understand: Calculating linear breakeven points; calculating nonlinear breakeven points; effect of changes in costs and revenue; strategies associated with capacity limits, expansion and profits; isocosts and breakeven between products;...
In this chapter, risk is accounted for by (1) applying a discount rate commensurate with the riskiness of the cash flows, and (2), by using a certainty equivalent factor
In chapter 8, risk is accounted for by evaluating the project using sensitivity and breakeven analysis.
For instance, based on the pure management fee model
described above, a fund with a 1.5% management fee and
fixed expenses of $600,000 would break even at $40 mil-
lion in AUM. By decreasing fixed expenses by $60,000, or
10%, the fund’s breakeven AUM drops by $4 million to $36 million. Stated differently, $15,000 in fixed
expenses equates to $1 million in AUM.
After studying this chapter, you will know: Explain cost-volume-profit (CVP) analysis, the CVP model, and the strategic role of CVP analysis; apply CVP analysis for breakeven planning; apply CVP analysis for profit planning; apply CVP analysis using activity-based costing (ABC);…