Value Creation and Investment Projects: An Application of Fuzzy Sensitivity Analysis to Project Financing Transactions

Abstract

This paper presents a methodology which blends sensitivity analysis (SA) and fuzzy arithmetic for managing uncertainty in project financing transactions. Specifically, we adopt the perspective of the equityholders and use the average return on equity (ROE) to measure shareholder value creation and, in particular, the financial efficiency of the equity investment. We cope with uncertainty via global and local SA and fuzzy arithmetic; we use the fuzzy version of the well-known (global) Gamma indicator and we introduce the fuzzy versions of two (local) importance measures, the differential importance measures (DIM). We then apply them to the pro forma financial statements drawn up by the analyst for measuring and ranking the impact of the key accounting parameters on the resulting values and we show how the uncertain accounting and financial magnitudes of the project company affect the financial efficiency. Among the advantages of this analysis, aimed to enhance the managerial insights generated by the financial model and to lead to appropriate managerial actions, we focus on the attractiveness of fuzzy calculus and possibility theory to represent and compute all relevant financial data that appear in project financing and budgeting, where available information is characterized by incompleteness or nonstatistical uncertainty. In this context, fuzzy computing and appropriate SA techniques, based on application of the extension principle, allow complete investigation of the project characteristics.