FM sensitivites

Question 1

How to calc sensitivity of initial investment

Answer 1

NPV of whole project/NPV of initial invesmtent

Question 2

How to calc sensitivity of sales price

Answer 2

NPV of whole project/NPV of sales(revenue)

Question 3

How to calc sensitivity of sales volume

Answer 3

Impacts revenues and variable costs so use contribution

Question 4

How to calc sensitivity to discount rate

Answer 4

Cost of capital less IRR (use IRR formula over the cashflows inc invitial investment)

therefore could increase by the difference here before NPV would be 0.

Question 5

How to calc sensitivity to project life

Answer 5

Discounted payback perio so take all cashflows and discount to PV, then use cumulative PV to to determine when the payback period is, if the project is 4 years long but discounted payback puts this at 3.25 years then the project life could be reduced by 9 months before NPV would fall to nil.

Just think youre working out how much you could shorten th eproject ebfore it would not be viable so PV of cashflow and working this out logically makes sense.

Question 6

How to calc sensitivities whilst factoring in tax

Answer 6

NPV of whole project/NPV of affected cash flows net of tax