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Analysis Phase: Data Collection and Analysis

The analysis phase requires collection of relevant data and its processing. The costs, benefits, and uncertainties associated with the decision opportunities are specified, and then combined in relevant option or decision analysis framework. The cost benefit from financial perspective and technological perspective are totally different.

Financial Perspective: The main focus is the risk affecting a market; those cannot be avoided by diversification. Identifying the market risks associated with projects and products is more difficult. There often is no financial market for the results of the development project. At this stage, it helps if volatility of underlying asset is taken into consideration.

Financial perspective needs to calculate the statistics of the underlying assets and apply standard risk-neutral valuation procedures to adjust the potential future outcomes. This transforms the market risks into risk-neutral quantities that can be evaluated using the risk-free rate of return. The result is input into the decision analysis that also incorporates the project risks.

Technological Perspective: Project risk is central, those uniquely associated with the specific investment under consideration. These can usefully be associated with three aspects of the project: -