Duration Measures for Corporate Project Valuation

Abstract

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 the project cash flows relative to changes in the discount rate (or adjusted for changes in a particular 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.

Keywords: sensitivity analysis, duration, NPV, payback period, adjusted payback period, cash flow

JEL Classification: G30, G31