Professional Documents
Culture Documents
Aliya Zubair
Ankan Langthasa
Avinash D.
Gurashish Singh
M. Venugopal Reddy
Parag Rastogi
Introduction
Sensitivity analysis is a way of analysing
change in the project’s NPV (or IRR) for a
given change in one of the variables
The more sensitive the NPV, the more
critical is the variable
Steps in Sensitivity Analysis
Identification of all those variables, which
have an influence on the project’s NPV
Definition of the underlying (mathematical)
relationship between the variables
Analysis of the impact of the change in
each of the variables on the project’s NPV
Risk and Uncertainty
Risk is referred to a situation where the
probability distribution of the cash flows of
an investment proposal is known.
Uncertainty is different from risk in sense
because here no information is available to
formulate a probability distribution of the
cash flows.
NPV
Total present value of a time series of cash
flows
An indicator of how much value an
investment or project adds to the value of
the firm
NPV= PVB - PVC
IRR
Annualized effective compounded return
rate which can be earned on the invested
capital
A project is a good investment proposition
if its IRR is greater than the rate of return
that could be earned by alternate
investments
In the context of savings and loans the IRR
is also called effective interest rate
Cost-benefit analysis
Weighing the total expected costs against
the total expected benefits
Used to assess the value for money of very
large private and public sector projects
The Benefit-Cost Ratio is given by the
formula:
BCR = Present Worth of Benefits
Present Worth of Costs
Sensitivity Analysis of a Model
Project On Cultivation Of Oil
Palm
Before Sensitivity Analysis
Financial indicators
Discount factor 15%
NPV of costs 97,947