Sensitivity analysis is a very common exercise performed with the forecasting of project cash flows. In this paper, a duration-type measure is generated that provides a single number for the assessment of project cash flows relative to changes in the discount rate (or adjusted for changes in a particular cash flow model parameter). The calculation is no more difficult than the duration measures that already exist for bonds. Yet, the calculation provides valuable insight that many times is lost when performing sensitivity analysis. Further, at a minimum, the measure provides a gauge for the consequences of mis-specifiying the discount rate for a project.
Copyright © 2008 Institute of Industrial Engineers. Article first published online: 2008. DOI: 10.1080/00137910802058509.
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Arnold, Tom, and David S. North. "Duration Measures for Corporate Project Valuation." The Engineering Economist 53, no. 2 (April/May, 2008): 103-17. doi:10.1080/00137910802058509.
Arnold, Tom and North, David S., "Duration Measures for Corporate Project Valuation" (2008). Finance Faculty Publications. Paper 10.