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    Sensitivity Analysis

    Uploaded by

    Bijoy Salahuddin
    The document analyzes the sensitivity of a project's net present value (NPV) to changes in key variables through 6 scenarios: 1. A 14.8% increase in investment decreases NPV from positive to negative. 2. A 12.5% decrease in sales significantly decreases NPV from positive to negative. 3. An increase in variable costs from 81.25% to 83% decreases NPV below zero. 4. A 5% increase in fixed costs lowers but keeps NPV positive. 5. A 1% increase in the discount rate lowers NPV slightly but keeps it positive. 6. Shortening the project life by 1 year lowers N

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    © All Rights Reserved
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    Sensitivity Analysis

    Uploaded by

    Bijoy Salahuddin
    317 views4 pages
    The document analyzes the sensitivity of a project's net present value (NPV) to changes in key variables through 6 scenarios: 1. A 14.8% increase in investment decreases NPV from positive to negative. 2. A 12.5% decrease in sales significantly decreases NPV from positive to negative. 3. An increase in variable costs from 81.25% to 83% decreases NPV below zero. 4. A 5% increase in fixed costs lowers but keeps NPV positive. 5. A 1% increase in the discount rate lowers NPV slightly but keeps it positive. 6. Shortening the project life by 1 year lowers N

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    Sensitivity Analysis or Project Analysis

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    The document analyzes the sensitivity of a project's net present value (NPV) to changes in key variables through 6 scenarios: 1. A 14.8% increase in investment decreases NPV from positive to negative. 2. A 12.5% decrease in sales significantly decreases NPV from positive to negative. 3. An increase in variable costs from 81.25% to 83% decreases NPV below zero. 4. A 5% increase in fixed costs lowers but keeps NPV positive. 5. A 1% increase in the discount rate lowers NPV slightly but keeps it positive. 6. Shortening the project life by 1 year lowers N

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    317 views4 pages

    Sensitivity Analysis

    Uploaded by

    Bijoy Salahuddin
    The document analyzes the sensitivity of a project's net present value (NPV) to changes in key variables through 6 scenarios: 1. A 14.8% increase in investment decreases NPV from positive to negative. 2. A 12.5% decrease in sales significantly decreases NPV from positive to negative. 3. An increase in variable costs from 81.25% to 83% decreases NPV below zero. 4. A 5% increase in fixed costs lowers but keeps NPV positive. 5. A 1% increase in the discount rate lowers NPV slightly but keeps it positive. 6. Shortening the project life by 1 year lowers N

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Sensitivity Analysis

    Year 0
    Year 1-12
    Tk.5400000
    Tk.16,000,00
    0
    13,000,000
    2,000,000
    450,000
    550,000
    220,000
    330,000
    450,000
    780,000
    780,000
    Tk.5400000

    Investment
    1. Sales
    2. Variable Costs
    3. Fixed Costs
    4. Depreciation
    5. Pretax Profit (1-2-3-4)
    6. Taxes (at 40%)
    7. Profit after tax
    8. Depreciation
    9. Cash flow from operation
    10.Net Cash flow

    1. Change in investment from Tk.5,400,000 to Tk.6,200,000


    Investment

    -Tk.6,200,000

    Sales
    Variable Cost
    Fixed Costs
    depreciation
    Pretax Profit
    Taxes @ 40%
    Profit After Tax
    depreciation
    Cash flow from operation
    PV = 806667.67*12-year annuity factor

    Tk.16,000,00
    0.00
    13,000,000.
    00
    2,000,000.0
    0
    516,666.67
    483,333.33
    193,333.33
    290,000.00
    516,666.67
    806,666.67

    = 806667.67*7.536
    = Tk.6079102.934
    NPV = PV investment
    = 6079102.934 6200000
    = -Tk.120,897
    Comment:
    The above scenario indicates, a small rise in investment amount negatively effects the Net
    Present value i.e. a rise of 14.8% or Tk.800000 in investment will reduce NPV from Tk.478000
    to -Tk.120897 which makes the project unacceptable under the accept/reject criteria of NPV.
    2. Change in sales from Tk.1,600,000 to Tk.1,400,000
    Investment
    Sales
    Variable Cost
    Fixed Costs

    -Tk.5400000
    Tk.14,000,00
    0.00
    11,375,000.
    00
    2,000,000.0
    0

    depreciation
    Pretax Profit
    Taxes @ 40%
    Profit After Tax
    depreciation
    Cash flow from operation
    PV = 555,000.00*12-year annuity factor

    450,000.00
    175,000.00
    70,000.00
    105,000.00
    450,000.00
    555,000.00

    = 555,000.00*7.536
    = Tk.4182523.299
    NPV = PV investment
    = Tk.4182523.299 Tk.5400000
    = -Tk. 1,217,476
    Comment:
    The above analysis shows, a decrease in sales affects the Projects NPV. A decrease of 12.5%
    in sales will significantly decrease the NPV from Tk.478000 to -Tk. 1,217,476 thus the project
    losses its acceptability.
    3. Change in variable cost from 81.25% to 83%
    Investment

    -Tk.5400000

    Sales
    Variable Cost
    Fixed Costs
    depreciation
    Pretax Profit
    Taxes @ 40%
    Profit After Tax
    depreciation
    Cash flow from operation
    PV = 612,000.00*12-year annuity factor

    Tk.16,000,00
    0.00
    13,280,000.
    00
    2,000,000.0
    0
    450,000.00
    270,000.00
    108,000.00
    162,000.00
    450,000.00
    612,000.00

    = 612,000.00*7.536
    = Tk.4612079.746
    NPV = PV investment
    = Tk.4612079.746 Tk.5400000
    = -Tk.787920
    Comment:
    The above scenario shows that an increase in variable cost also makes the NPV negative. The
    rise in variable cost significantly reduces the NPV to -Tk.787920 as a result the project
    becomes unacceptable under unfavorable condition.
    4. Change in Fixed cost from Tk.2000,000 to 2,100,000
    Investment
    Sales

    -Tk.5400000
    Tk.16,000,00
    0.00

    13,000,000.
    00
    2,100,000.0
    0
    450,000.00
    450,000.00
    180,000.00
    270,000.00
    450,000.00
    720,000.00

    Variable Cost
    Fixed Costs
    depreciation
    Pretax Profit
    Taxes @ 40%
    Profit After Tax
    depreciation
    Cash flow from operation
    PV = 720,000.00*12-year annuity factor
    = 720,000.00*7.536
    = Tk.5425976
    NPV = PV investment
    = Tk.5425976 Tk.5400000
    = Tk.25976
    Comment:

    The above scenario indicates an increase of 5% in Fixed cost reduces the by the amount of Tk.
    452,024. Although it reduces the NPV by a significant amount the NPV still remains positive
    i.e. the project remains acceptable under the accept/reject criteria of NPV.

    5. Change in discount rate from 8 % to 9%


    Investment

    -Tk.5400000

    Sales
    Variable Cost
    Fixed Costs
    depreciation
    Pretax Profit
    Taxes @ 40%
    Profit After Tax
    depreciation
    Cash flow from operation
    PV = 780,000.00*12-year annuity factor
    = 780,000.00*7.161
    = Tk.5585366
    NPV = PV investment
    = Tk.5585366 Tk.5400000
    = Tk. 185,366
    Comment:

    Tk.16,000,00
    0.00
    13,000,000.
    00
    2,000,000.0
    0
    450,000.00
    550,000.00
    220,000.00
    330,000.00
    450,000.00
    780,000.00

    Under the above condition an increase in discount rate reduces the NPV by the amount of Tk.
    292,634. Though it reduces NPV but according to the accept/reject criteria of NPV the project
    is still acceptable.
    6. Change in investment life from 12 years to 11 years
    Investment

    -Tk.5400000

    Sales
    Variable Cost
    Fixed Costs
    depreciation
    Pretax Profit
    Taxes @ 40%
    Profit After Tax
    depreciation
    Cash flow from operation

    Tk.16,000,00
    0.00
    13,000,000.
    00
    2,000,000.0
    0
    490,909.09
    509,090.91
    203,636.36
    305,454.55
    490,909.09
    796,363.64

    PV = 796,363.64*12-year annuity factor


    = 796,363.64*7.139
    = Tk. 5,685,212
    NPV = PV investment
    = Tk.5685212 Tk.5400000
    = Tk. 285,212
    Comment:
    The above scenario indicates the change in investment life negatively affect the projects
    cash flows. Lowering the projects life reduces the NPV by the amount of Tk.492778. Although
    the NPV has been reduced but the project is still acceptable under the accept reject criteria of
    NPV.

    Overall analysis on the project


    The Projects NPV is affected differently under different scenarios. Depending on the type and
    amount of change in the variables the NPV shows different values ranging from positive to
    negative. Negatives changes in the variables significantly affect the NPV. Negative changes in
    investment, sales & variable cost has made the project unacceptable under the accept/reject
    criteria of NPV as all these variables shows significant negative NPV and the values are -Tk.
    120,897, -Tk. 1,217,476, -Tk.787920 respectively where on the other hand, changes in fixed
    cost, discount rate and projects life show positive NPV in spite of higher fixed cost, discount
    rate and lower projects life. From the above calculation it indicates the most crucial variable
    is Sales which shows a 12.5% drop in sales has significantly reduced the NPV compared to
    other variables analyzed. Therefore the Sales variable has to be taken into consideration
    seriously in order to reduce the future risk and return.

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