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

See all articles by Emanuele Borgonovo

Emanuele Borgonovo

Bocconi University - Department of Decision Sciences

Lorenzo Peccati

Bocconi University - Department of Decision Sciences

Stefano Gatti

Bocconi University - Department of Finance

Date Written: December 30, 2009

Abstract

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

Suggested Citation

Borgonovo, Emanuele and Peccati, Lorenzo and Gatti, Stefano, What Drives Value Creation in Investment Projects? An Application of Sensitivity Analysis to Project Finance Transactions (December 30, 2009). European Journal of Operational Research, Vol. 205, No. 1, pp. 227-236, 2009. Available at SSRN: https://ssrn.com/abstract=1590334

Emanuele Borgonovo (Contact Author)

Bocconi University - Department of Decision Sciences ( email )

Via Roentgen 1
Milan, 20136
Italy

Lorenzo Peccati

Bocconi University - Department of Decision Sciences ( email )

Via Roentgen 1
Milan, 20136
Italy

Stefano Gatti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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