Scribd
Upload
43 views

Scenario Analysis Lesson

This document presents a sensitivity analysis of a potential investment project. It calculates the net present value (NPV) of the project's cash flows using two different methods, getting the same NPV of $32,078.57. It then identifies the percentage change in initial outlay and scrap value that would cause the NPV to become zero and the project rejection. A 6% increase in initial outlay or 61% decrease in scrap value would lead to rejecting the project. Scenario analysis is also mentioned as an alternative to sensitivity analysis.

Uploaded by

Barack Mike
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
43 views

Scenario Analysis Lesson

This document presents a sensitivity analysis of a potential investment project. It calculates the net present value (NPV) of the project's cash flows using two different methods, getting the same NPV of $32,078.57. It then identifies the percentage change in initial outlay and scrap value that would cause the NPV to become zero and the project rejection. A 6% increase in initial outlay or 61% decrease in scrap value would lead to rejecting the project. Scenario analysis is also mentioned as an alternative to sensitivity analysis.

Uploaded by

Barack Mike
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
You are on page 1/ 2

SENSITIVITY ANALYSIS

Initial Outlay 500,000


Sales 600,000 pa for 3yrs Annuity
VC 350,000
FC 40,000
Scrap Value 80,000 Single CF end of year 3
COC 15%

SOLUTION:
A) NPV
USING NPV FUNCTION:
Working: Profit per year 210,000

Relevant Cashflows per year:


0 1 2 3
InitiaL outlay (500,000.00)
Profit for the period 210,000.00 210,000.00 210,000.00
Scrap value 80,000.00
Total relevant cashflow (500,000.00) 210,000.00 210,000.00 290,000.00

NPV 32,078.57

USING LONG METHOD


PV I.O TEST S.V TEST
Sales Ksh.1,369,935.07 Ksh.1,369,935.07
VC (Ksh.799,128.79) (Ksh.799,128.79)
FC (Ksh.91,329.00) (Ksh.91,329.00)
Scrap Value Ksh.52,601.30 Ksh.52,601.30
Ksh.532,078.57 Ksh.532,078.57
Initial outlay (500,000.00) (Ksh.532,078.57)
NPV Ksh.32,078.57 Ksh.0.00

B) Percentage change/ Sensitivity margin for each of the following on NPV to reverse the decision
based on NPV in A above
NPV
PV of the future cashflow of the factor

i) Initial Outlay 6% If the I.O is increased by atleast 6%, we shall reject the project

ii) Scrap value 61% If the S.V is decreased by atleast 61%, we shall reject the project
ADVANT AND DISADV OF SENSITIVITY ANALYSIS

SCENARIO ANALYSIS

You might also like