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What drives value creation in investment projects? An application of sensitivity analysis to project finance transactions

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  • Borgonovo, E.
  • Gatti, S.
  • Peccati, L.

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 modelling efforts. We propose a methodology based on the so-called "differential importance measure (D)" 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's 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.

Suggested Citation

  • Borgonovo, E. & Gatti, S. & Peccati, L., 2010. "What drives value creation in investment projects? An application of sensitivity analysis to project finance transactions," European Journal of Operational Research, Elsevier, vol. 205(1), pages 227-236, August.
  • Handle: RePEc:eee:ejores:v:205:y:2010:i:1:p:227-236
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Magni, Carlo Alberto, 2015. "Investment, financing and the role of ROA and WACC in value creation," European Journal of Operational Research, Elsevier, vol. 244(3), pages 855-866.
    2. Carlo Alberto Magni, 2015. "Investment, financing and the role of ROA and WACC in value creation," Department of Economics 0050, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    3. Borgonovo, Emanuele & Gatti, Stefano, 2013. "Risk analysis with contractual default. Does covenant breach matter?," European Journal of Operational Research, Elsevier, vol. 230(2), pages 431-443.
    4. Andrea Marchiioni & Carlo Alberto Magni, 2016. "Sensitivity analysis and investment decisions: NPV-consistency of rates of return," Department of Economics 0089, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    5. Magni, Carlo Alberto & Veronese, Piero & Graziani, Rebecca, 2017. "Chisini means and rational decision making: Equivalence of investment criteria," MPRA Paper 81532, University Library of Munich, Germany.
    6. repec:eee:ejores:v:270:y:2018:i:1:p:1-24 is not listed on IDEAS
    7. repec:eee:ejores:v:268:y:2018:i:1:p:361-372 is not listed on IDEAS
    8. Carlo Alberto Magni, 2015. "ROI and profitability index: A note on managerial performance," Department of Economics 0048, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    9. Borgonovo, E. & Smith, C.L., 2012. "Composite multilinearity, epistemic uncertainty and risk achievement worth," European Journal of Operational Research, Elsevier, vol. 222(2), pages 301-311.
    10. Barry ANDERSON & Emanuele BORGONOVO & Marzio GALEOTTI & Roberto ROSON, 2012. "Uncertainty in climate change modelling: can global sensitivity analysis be of help?," Departmental Working Papers 2012-18, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.

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