W9_Reginald Nwachukwu_Risk Analysis of Preferred Business Alternative

 

1. Problem Definition and Opportunity Statement:

Referencing W7_Reginald Nwachukwu_Analysis of Business Plans Using ROI ROS & B.E. Analysis and W8_Reginald Nwachukwu_Economic and Financial Modeling of Alternative Business Plans; it is desired to investigate the Project Risk of 3D Modeling Training Center Project Using the impact of NPV on cash inflows. The risk analysis is examine how the uncertaintity in the estimated cash flow of the project changes when 'What-If ' questions are asked ? Example, what happens to revenue if only 13 people were trained throughout the 2nd year of project life ? Below is the project data used for risk analysis. 

Figure 1-1 Project data used for risk analysis

 

2. Development of Feasible Alternatives:

The following are feasible alternatives used to analysed the effects of risk of estimated cash flow and results obtained from their analysis are used to evaluate the impact of risk:

(a.) Sensitivity Analysis

(b.) Scenario Analysis

(c.) Monte Carlo Method

(d) Decision Analysis

Only, Sensitivity and Scenario analytical methods are applied here for brevity.

3. Development of Outcome for Each Alternative:

The outcome for each alternative is to plot the Sensitivity and Scenario Graphs which measures the "steepness" or "flatness" of the straightlines of each "What-If" variable been considered.

A steeper line show much variability with respect to NPV, whereas flatten straightline shows little or no variability with NPV.  

4. Selection of Acceptable Criteria:

The criteria used to select the preferred method of project risk analysis is the technique that provides insight on how changes on the estimated cash inflow can affect the NPV of the project. 

5. Analysis and Comparison:

Analysis are performed on the estimated cash inflows using Sensitivity and the Scenario Analytical tools as show below viz:

 

 

 

6. Selection of Preferred Alternative:

The Sensitivity Analytical Method is the preferred alternative for project risk anysis since it examines the impact of what-if variables on the Net Present Value (NPV or NPW) of the estimated cash flow; whereas the Scenario analysis looks at NPV within the range where risk can be anticipated.

 

7. Performance Reporting and Evaluations of  Results:

Performance and reporting of the project estimated cash inflow  will be monitored using results obtained from the sensitivity analysis.

 

References:

Park C.S (2005) Fundamental of Engineering Economy Lecture No.29 Retrieved from

http://faculty.kfupm.edu.sa/SE/atique/SE307_Engineering_Economics/Lecture-No29.ppt

Kvlahos Kiriakos (2000) Financial Modeling and Risk Analysis Retrieved from

http://faculty.london.edu/kvlahos/dra/ppp/Risk-Analysis.ppt

 

Giammalvo, P. (2012). Integrated Portfolio (Asset), Program (Operations) and Project Management (Cost Engineering)   Day #2  pp.49-57).An AACE Methodology Course 2012 Lagos, Nigeria: Lonadek

 

Ezeh J.C. & G.N. Ezeh (2000) Fundamental of Engineering Economy (pp.14-21)MC Computers Press Owerri