PROJECT RISK ANALYSIS – The Overall Picture

Stand alone risk is measured by Stand Alone Risk of the Project is

 Sensitivity Analysis denoted by standard deviation of
 Scenario Analysis the project returns = P
 Monte Carlo
Simulation
 Decision Tree Analysis

Contributes to the

Contribution of Market risk is Market risk of the firm. The Corporate risk of the firm. The
measured by Contribution (denoted by Contribution (denoted by bP.F) is
 Pure Play Method bP.M) is measured by measured by regressing the
 Accounting Beta Method regressing the returns on returns on project against the
project against the returns on returns on the forms other assets
the stock market index. without the project.
Mathematically Mathematically
Application of the CAPM
concepts to analyze the effects of    
market risk of the project on bP.M   P .rP.M bP.F   P .rP.F
market risk of the firm  M   F 

Market risk of the project affects the market beta

bFirm  w1bOA  w2 bP.M of the firm and therefore also
has effects on
1. Cost of Equity k S  k RF  (k M  k RF ).bFirm
^ D1
2. Stock Price PO 
kS  g
3. WACC  w1 k d (1  T )  w2 (k S ork ce )