Chapter 6 Financial Leverage, Project Equity, and Sensitivity of NPV

Abstract

We develop two new measures for assessing project uncertainty in sensitivity/scenario analyses. For sensitivity analysis, we develop the “Z% Elasticity Coefficient,” building on the elasticity concept in economics. For scenario analyses, we develop the “Proportionate Range.” Both are substitutes for employing mean–variance (of Net Present Value or NPV) analysis, which has been criticized for assessing project uncertainty. The appendix provides examples of computing each measure for a hypothetical project.

Citation

Steven Smith, W. and Dennis, S.A. (2012), "Chapter 6 Financial Leverage, Project Equity, and Sensitivity of NPV", Kensinger, J.W. (Ed.) Research in Finance (Research in Finance, Vol. 28), Emerald Group Publishing Limited, Leeds, pp. 111-123. https://doi.org/10.1108/S0196-3821(2012)0000028009