WK 6: chapter 12 risk analysis

A measure of the relative amounts of ficed and variable costs in a project's cost structure; operating leverage is higher with more fixed costs

• Degree of pretax cash flow operating leverage.
• A measure of the sensitivity of cash flows from operations (EBITDA) to changes in revenue. 
• Tells how much EBITDA in % will change for every 1% change in revenue

• Degree of accounting operating leverage
• A measure of the sensitivity of accounting operating profits (EBIT) to changes in revenue.
• Tells for every 1% change in revenue, how much does EBIT change.

Analysis that tells us how many units must be sold in order for a project to break even on a cash flow or accounting profit basis.

The level of unit sales at which cash flows or profitability for one project alternative switches from being lower than that of another alternative to being higher.

• Examination of the sensivity of the results from a financial analysis to changes in individual assumptions
• Eg. changes in unit sales

• analytical method concerned with how the results from a financial analysis will change under alternative scenarios.
• Eg. weak, strong, expected economic/market conditions

• looks at  a large number of scenarios in a short time.
• Uses a computer to quickly examine a large number of scenarios and obtain probability estimates for various values in a financial analysis.

• Measure of the value a project generates for each dollar invested in that project.
• (NPV + initial investment)/ initial investment

Fixed costs associated with a project do not change as revenue changes therefore fluctuations in revenue are magnified so that pre tax operating cash flows and EBIT fluctuate more than revenue in % terms.