What Drives Value Creation in Investment Projects? An Application of Sensitivity Analysis to Project Finance Transactions
European Journal of Operational Research, Vol. 205, No. 1, pp. 227-236, 2009
Posted: 15 Apr 2010
Date Written: December 30, 2009
Evaluating the economic attractiveness of large projects often requires the development of large and complex financial models. Model complexity can prevent management from obtaining crucial information, with the risk of a suboptimal exploitation of the modeling efforts. We propose a methodology based on the so-called ‘‘differential importance measure ðDÞ” to enhance the managerial insights obtained from financial models. We illustrate our methodology by applying it to a project finance case study. We show that the additivity property of D grants analysts and managers full flexibility in combining parameters into any group and at the desired aggregation level. We analyze investment criteria related to both the investors’ and lenders’ perspectives. Results indicate that exogenous factors affect investors (sponsors and lenders) in different ways, whether exogenous variables are considered individually or by groups.
Keywords: Risk Analysis, Project Finance, Investment Analysis, Sensitivity Analysis
JEL Classification: G17, G31
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