Group 14

Case 15
Presentation

Presented By:
Group 14
Group 14 Steven Nathanael
22/492125/EK/23702
Naufal Hafizha Buana
22/492398/EK/23754
Hend Manai
23/523843/NEK/27692
 Identify essential
factors

Question 1
Why should
sensitivity analysis
Sensitivity
Assess risk
be a part of the analysis
company’s capital
budgeting process

Improve decision-
making
 Discount rate

Question 2
Explain the role of
weighted average
WACC Cost of capital
cost of capital in the
capital budgeting
process.

Capital structure
Question 3
Interpret the additional data and information given in the case for
Projects A,B, and C. Determine the sensitivity of Project B
changes in the annual cash inflows in and to changes in net
outlay. To which change is the project’s economic value more
sensitive? Why might this be the case?
According to the sensitivity analysis, the NPV
of Project B's economic value is more
sensitive to changes in cash inflow than to
changes in net spending.
 Conclusions
The cost of capital remains constant at 10% across all three projects. However, the Net Present Value
(NPV) and Internal Rate of Return (IRR) vary as each project interacts with external variables. The case
indicates that external factors affect the IRR and NPV, despite the stable cost of capital.

The NPV and IRR are closely related, where a higher IRR implies a higher NPV. Projects with IRR
exceeding their cost of capital are preferred because it signifies that the present value of expected cash
inflows surpasses the present value of expected cash outflows.

A project with a low IRR but a high NPV suggests slower returns but substantial overall value addition.
shorter projects tend to have higher IRR due to quicker returns, while longer projects may have lower IRR,
but they offer steady, long-term value to the company.

The sensitivity analysis results for projects A, B, and C, considering the impact of external variables
on their NPV and IRR, demonstrate that a project's sensitivity to these variables affects the NPV. In
this context, Kirby Corporation is more sensitive to cash inflows than to net outlays, indicating that
changes in cash inflows have a more significant impact on NPV.
 The calculation in Question 3 has specifically altered the perspective of
NPV and IRR in the two-dimensional sense of the cost of capital. This
alteration is primarily due to the sensitivity analysis performed, which
considers the impact of changes in cash inflow and net outlay on Project
B's NPV and IRR.

The key change is related to how sensitive NPV is to variations in cash

Question 5 inflow compared to net outlay. In this analysis, it is evident that NPV is
more sensitive to changes in cash inflow. This means that relatively
small changes in cash inflow can have a more significant impact on
Project B's NPV compared to changes in net outlay.

The sensitivity analysis demonstrates that the NPV of Project B is more

sensitive to changes in cash inflow compared to changes in net outlay.
Specifically, for every $1 increase in cash inflow, the NPV of Project B
increases by approximately $7.73, while for every $1 increase in net
outlay, the NPV decreases by approximately $6.80.
 Focus on Cash Inflows

Question 5
Risk Assessment and
Mitigation
What does this
result mean for the
company’s future
capital budgeting
efforts?
Strategic Decision-Making

Continuous Monitoring
 Is Garrison’s decision to use previously approved projects as an
example of sensitivity analysis sound?

Sound aspect:

Educational Purpose: Using previously approved projects can serve as an educational tool to illustrate
the concept of sensitivity analysis to stakeholders who may not be familiar with the process. It can help in
demystifying the importance of sensitivity analysis in decision-making.

Highlighting the Need for Sensitivity Analysis: The decision effectively emphasizes the need for
sensitivity analysis within the company. By using past projects, Garrison can draw attention to the
importance of considering external variables and quantifiable aspects when evaluating investments.

Documenting for Future Reference: The results of sensitivity analysis on previously approved projects
can be documented and included in capital budgeting manuals. This serves as an illustrative example for
future reference and can help in institutionalizing sensitivity analysis within the organization.
 Is Garrison’s decision to use previously approved projects as an
example of sensitivity analysis sound?

Limitations:

Limited Relevance to Current or Future Projects: The sensitivity analysis conducted on previously
approved projects may not be directly applicable to current or future projects, especially if there have
been significant changes in market conditions, industry dynamics, or regulatory factors.

Inaccurate Information: As mentioned, the information used for historical projects may not be entirely
accurate or up-to-date. Using such data can lead to misleading or incomplete results, potentially
misrepresenting the significance of sensitivity analysis.

Incomprehensive Coverage: Many quantifiable aspects, such as inflation projections, that can affect cost
components and cash inflows may not have been considered in the base value of the analysis. This can
result in an incomplete assessment of risk and sensitivity.
 How would the call for sensitivity analysis be incorporated
into the firm’s capital budgeting manual?

Sensitivity Analysis
Application
Application nº 01
forecasting the attention of management on critical variables and showing
where additional analysis may be beneficial before finally accepting a
project.

Application nº 02
helps a business if the project estimation becomes unreliable by using a
specific boundary that correlates with variables.

Application nº 03
measure how variables can generate expected results before making an
investment.
 Why might there be resistance to this idea at various levels?

Resistance to the Idea

Resistance might happen if the value concerning external variables

is higher than the value of concerning internal variables.

Disagreements might arise from Kirby Company's propensity to

apply sensitivity analysis to external factors, as they have never
taken into account external factors.
How should such resistance be handled and by whom?

Who To Handle The

Resistance?

Managers and decision-makers needs to ensure the

uncertainties from the shareholders by decision model
sensitivity analysis are taken into account.
 Comment upon need, or lack thereof, to update or revise the
list of economic variables that go into the sensitivity analysis.

Variables Update

NOTE:
Cash flow While other economic variables
might be included, it might
impact currently running
project.

Cash flow growth rate

Cost of capital
GOT
QUESTIONS?
THANK YOU