SENSITIVITY ANALYSIS:

D.17
YEAR INITIAL INV VARIABLE COST
0 -14000
1 -4000
2 -4000

YEAR DISCOUNT FACTOR INITIAL INV

0 1 14000
1 0.925925925925926
2 0.857338820301783
14000

SENSITIVITY MARGIN:
=NPV/PV OF VARIABLE *100

1 SALES SENSITIVITY :
=2049/23182*100 8.84%

2 VARIABLE COST SENSITIVITY

=2049/7133*100 28.73%

3 SALES VOLUME SENSITIVITY:

=NPV/(SALES-VARIABLE COST)*100
=2049/(23182-7133)*1000
12.77%

4 INITIAL INV SENSITIVITY:

=2049/14000*100 14.64%

5 COST OF CAPITAL
FIND IRR

YEAR CF DF 8%
0 -14000 1
1 9000 0.925925925925926
2 9000 0.857338820301783
 SENSITIVITY = IRR-COC/COC
=18.5-8/8
131%

IF THE COST OF CAPITAL INCREASES BY 18.5%, THEN THE NPV WILL BE 0

MOST CRUCIAL VARIABLE = SALES = 8.84%

D.18
YEARS DF AT 10% INITIAL INV
0 1 -1000
1 0.909090909090909
2 0.826446280991735
3 0.751314800901578
4 0.683013455365071
1000

SENSITIVITY MARGIN = NPV/PV OF VARIABLE *100

NPV = 267.95

1 SALES SENSITIVITY =267.95/6339.73*100

2 MATERIAL COST SENSITIVITY =267.95/3169.87*100

3 LABOUR COST SENSITIVITY =267.95/1267.95*100

4 VARIABLE OH SENSITIVITY =267.95/316.99*100

5 FIXED COST SENSITIVITY =267.95/316.99*100

6 SALES VOLUME SENSITIVITY

=NPV/SALES-VC*100 =267.95/6339.73-3169.87-1267.95-316.99-316.99

7 INITIAL INV SENSITIVITY =267.95/1000*100

8 COC SENSITIVITY
=IRR-COC/COC*100

IRR:
YEAR CASH FLOW DF AT 10%
0 -10000 1
1 400 0.909090909090909
2 400 0.826446280991735
3 400 0.751314800901578
4 400 0.683013455365071

-47.11%
CASH INFLOW NET CASH FLOW

13000 9000 COST OF CAPITAL = 8%

13000 9000

VARIABLE COST PV OF VC CASH INFLOW PV OF CF

4000 3703.7037037037 13000 12037.037037037

4000 3429.35528120713 13000 11145.404663923
7133 23182

IF THE SALES DECREASES BY 8.84%, THEN THE NPV WILL BE 0

IF THE VC INCREASES BY 28.73%, THEN THE NPV WILL BE 0

IF THE SALES VOLUME DECREASES BY 12.77%, THEN THE NPV WILL BE 0

IF THE INITIAL INV INCREASES BY 14.64%, THEN THE NPV WILL BE 0

PV DF 20% PV IRR
-14000 100% -14000 18.52%
8333.3333333333 0.833333333333333 7500
7716.0493827161 0.694444444444444 6250
2049 -250

IRR =8+(2049/(2049+250)*(20-8))
 1870%

LOWEST SENSITIVITY

SALES PV OF SALES MATERIAL COST PV OF MATERIAL CLABOUR COST

2000 1818.18181818182 1000 909.09090909091 400

2000 1652.89256198347 1000 826.44628099174 400
2000 1502.62960180316 1000 751.31480090158 400
2000 1366.02691073014 1000 683.01345536507 400
6339.73 3169.87

4.23% IF THE SALES DECREASES BY 4.23%, THEN THE NPV WILL BE 0

8.45% IF THE MATERIAL COST INCREASES BY8.45%, THEN THE NPV WILL BE 0

21.13% IF THE LABOUR COST INCREASES BY 21.13%, THEN THE NPV WILL BE 0

84.53% IF THE VARIABLE OH INCREASES BY 84.53%, THEN THE NPV WILL BE 0

84.53% IF THE FIXED COST INCREASES BY 84.53%, THEN THE NPV WILL BE 0

21.13% IF THE SALES VOLUME DECREASES BY 21.13%, THEN THE NPV WILL BE 0

26.80% IF THE INITIAL INV INCREASES BY 26.80%, THEN THE NPV WILL BE 0
PV DF AT3% PV DF 1% PV
-10000 1 -10000 1 -10000
363.63636363636 0.970873786407767 388.349514563107 0.990099009901 396.039603960396
330.5785123967 0.942595909133754 377.038363653502 0.9802960494069 392.118419762768
300.52592036063 0.91514165935316 366.056663741264 0.9705901479276 388.236059171058
273.20538214603 0.888487047915689 355.394819166275 0.9609803444828 384.392137793126
-8732.05 -8513.16063887585 -8439.21377931265
NPV 2049
PV OF LABOUR COST VARIABLE OH PV OF VARIABLE OH FIXED COST PV OF FC

363.636363636364 100 90.9090909090909 100 90.90909090909

330.578512396694 100 82.6446280991735 100 82.64462809917
300.525920360631 100 75.1314800901578 100 75.13148009016
273.205382146028 100 68.3013455365071 100 68.30134553651
1267.95 316.99 316.99
D.19
CERTAINTY EQUIVALENT APPROACH:

A.NPV AT 10%

YEAR CF DF 10% PV
0 -20000 1 -20000
1 14000 0.909091 12727.27 THE PROJECT WILL BE ACCEPTED AS IT IS POSITIVE
2 10000 0.826446 8264.463 BUT DOESN’T CONSIDER RISK
3 10000 0.751315 7513.148

NPV 8504.88

BCERTAINTY EQUIVALENT APPROACH

YEAR CF x CEC =CER CF RFR PV

0 -20000 -20000 1 -20000
1 14000 60% 8400 0.952381 8000
2 10000 50% 5000 0.907029 4535.147
3 10000 40% 4000 0.863838 3455.35
NPV -4009.502

D.20
YEAR 0 1 2 3 4
INITIAL INVESTMENT -20000
REVENUE 40000 38000 36000 34000 32000
MATERIAL COST 15000 15900 16500 17250 17700
LABOUR COST 5000 5300 5500 5750 5900
NET CASH FLOW -20000 16800 14000 11000 8400
RFR 5% 1 0.952381 0.907029 0.863838 0.822702
PV -20000 16000 12698.41 9502.214 6910.701
NPV 25111.33
E ACCEPTED AS IT IS POSITIVE

PROJECT CANNOT BE TAKEN BETTER NOT TO INVEST

NPV IS NEGATIVE
INCORPORATED RISK
RISK UNCERTAINTY

LARGE NUMBER OF POSSIBLE OUTCOME LARGE NUMBER OF POSSIBLE OUTCOMES

PAST EXPERIENCE NO PAST EXPERIENCE
PROBABILITY ASSIGNED PROBABILITY CANNOT BE AASSIGNED
SIMULATION IS USED

PROBABILITY ANALYSIS:
INCORPORATES RISK INTO THE INVESTMENT APPRAISAL

WE USE EXPECTED VALUE APPROACH

EXPECTED VALUE = AMOUNT x PROBABILITY

EXAMPLE:
ASSUME THE FRST YR CF IS NOT AFFECTING SCND YR CF
DISCOUNT RATE IS 10%
FIND NPV

YEAR CF PROBABILITY EV
0 -1000 -1000

500 50%
1 600 30% 570
700 20%

500 40%
2 450 30% 500
550 30%

IF THE FRST YEAR CF IS AFFECTING THE SCND YEAR CF, THEN WE SHOULD USE JOINT PROBABILIT

D.21
NPV PROB EXPECTED NPV

100 0.5 50
PROJECT A 200 0.4 80
1400 0.1 140 270
 0 0.5 0
PROJECT B 500 0.4 200
600 0.1 60 260

180 0.5 90
PROJECT C 190 0.4 76
200 0.1 20 186
OF POSSIBLE OUTCOMES

NNOT BE AASSIGNED

DF 10% PV
1 -1000

0.909091 518.1818181818

0.826446 413.2231404959 EXPECTED NPV -68.59504

LD USE JOINT PROBABILITIES

PROJECT A WILL BE SELECTED BECAUSE EXPECTED NPV OF PROJECT A IS HIGHER