How sensitivity analysis can gain insight in possible effect

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Following the traditional Capital investment- appraisal techniques (i.e. IRR and NPV), risks should be reflected in a higher discount rate. Taking into account that there are several types of risks, the traditional capital asset pricing models fail to provide ways to compose discount rates properly. Since there are no generally accepted methods or techniques to quantify the risks and to incorporate them in the discount rate; the choice of an appropriate discount rate is notoriously difficult.

Question 1: Describe the variables/ factors that an appropriate discount rate should reflect?

Question 2: How a sensitivity analysis can help gain insight in the possible effects of a bad-chosen discount rate?

Question 3: Do you believe that some additional screening criteria will be useful to ensure the accuracy of the model?

Reference no: EM132628467

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