Net Present Value Sensitivity Matrix
Sensitivity and specificity are statistical measurements of the performance of a binary classification test, also known in statistics as classification function. Sensitivity which is also referred as recall rate in some fields assesses the proportion of actual positives which are correctly identified as such. For instance, the percentage of sick people who are correctly identified as having the condition. Specificity criteria the proportion of negatives which are correctly identified such as the percentage of healthy people who are correctly identified as not having the condition. These two criteria are closely related to the concepts of type I and type II errors. A theoretical, optimal anticipation aspires to achieve 100% sensitivity i.e. anticipate all people from the sick group as sick and 100% specificity i.e. not anticipate anyone from the healthy group as sick. On the other hand theoretically any forecaster will possess a minimum error bound known as the Bayes error rate.
For any test, there is in general a trade off among the certain dimensions. For instance, in an airport security setting in which one is testing for possible threats to safety, scanners may be set to trigger on low-risk items like belt buckles and keys, in order to reduce the risk of missing objects that do set a threat to the aircraft and those aboard. This trade off can be interpreted graphically as an Receiver operating characteristic curve.
In finance, the net present value a also known as NPV or net present worth (NPW) of a time series of cash flows, both incoming and outgoing, is outlined as the sum of the present values i.e Pvs of the individual cash flows of the same entity.
In the case, when all future cash flows are incoming say for illustration coupons and principal of a bond and the only efflux of cash is the purchase price, the net present value is merely the present value of future cash flows minus the purchase price which is its own present value. The net present value is a central tool in discounted cash flow also referred as DCF analysis. It is a standard method for using the time value of money to appraise long term projects utilized for capital budgeting, and broadly throughout finance, economics and accounting, it assesses the extra or shortage of cash flows, in present value terms, once financing charges are gathered.
The net present value of a sequence of cash flows accepts as input the cash flows and a discount rate or discount curve and renders a price. The converse procedure in the discounted Cash Flows Cash flow statements have flow analysis is accepting a sequence of cash flows and a price as input and establish by deduction as output a discount rate. The discount rate which would yield the given price as net present value is referred as the yield and is more broadly utilized in bond trading.
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