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SENSITIVITY ANALYSIS

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

NPV of benefits 146,051

NPV of net benefits 48,104
BCR 1.49
IRR 25%
After Sensitivity Analysis
Financial indicators
Assumptions:
Discount factor 15%
Costs increased by
NPV of costs 107,7
10%
42
Market Prices
NPV of benefits 131,4
decreased by 10%
46
NPV of net 23,70
benefits 4
BCR 1.22
IRR 20%
Conclusion
The BC Ratio has reduced to 1.22.
This means that for one rupee spent, the
returns reduced to Rs. 1.22., which is lower
than the earlier value of Rs. 1.49.
IRR has also reduced from 25% to 20%.
The project is feasible but there is a
reduction in returns after changes.
Sensitivity Analysis can
answer…
Which are the variables with high
sensitivity indicators?
How likely are the (adverse) changes in the
values of the variables that would alter the
project decision?
Thank You