Explain How Probability Analysis Could Be Used to Assess the Risk

question 30

Multiple Choice

Explain how probability analysis could be used to assess the risk of the evaluated projects. Select all the true statements.

• A) The company can determine a range of possible outcomes for each of the cash flows in the project, for example, a high, low and medium estimate of each cash flow could be determined.
• B) The net present value (NPV) of the project, if all high, low or medium estimates occurred, can be calculated along with the combined probabilities of their occurrence.
• C) The probabilities can be combined to calculate the expected value of each cash flow element and of the project as a whole
• D) The NPVs of a sample range of possible outcomes and the probability of each NPV can be calculated. If a small sample is taken the distribution of outcomes can be used to calculate the zero activities deviation of the NPVs and the probability of success of the projects.

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Definitions:

Miller-Orr Model

A financial model used to manage the cash inventory of a firm by setting upper and lower limits on cash balances, determining when to transfer funds.

Cost of Borrowing

The cost of borrowing is the total expense that a company or individual incurs in taking out a loan, including interest payments, fees, and any other charges.

Cash Flows

The net amount of cash being transferred into and out of a business, used as an indicator of financial health.

Miller-Orr Model

The Miller-Orr Model is a financial model used to manage cash balances by setting upper and lower limits on cash reserves, suggesting when to transfer funds to minimize costs.