Senaitive Analsys

Question 1

What is sensitive analysis?

Answer 1

Is a technique of analysing how changes in an individual project variable affect a project overall net present value

In another words , it measures how responsive the NPV of the project is to changes in variables from which it has been calculated

Question 2

How many ways can we conduct the analysis ? Explain

Answer 2

We have two ways to conduct the analysis

1 - each project variable in turn is changed by a set amount , for example 5%, and the NPV is recalculated ( focusing in the changes that would effect NPV )

2- determine the amount of changes needed to make NPV BECOME 0. Attention that only one variable can be change at the time

Question 3

See the example of how calculate SENSITIVE ANALSYS

Answer 3

Ver

Question 4

How to interpreted Sensitive analysis

Example 1

Answer 4

The one that result in the lowest NPV is the most significant determinant to the success of the project.

Question 5

How to interpreted sensitive analysis

Interpretation of example 2

Answer 5

Compre x to the original value to find out how much change is required to move NPV = 0
The smaller the change requirements the higher would be its influence

Question 6

Calculate the exercise and practice

Answer 6

Ver

Question 7

How to describe the findings

Answer 7

From our summary table ( we need to create a table ) of our sensitive analysis, the project is most sensitive to changes is the lowest values ( describes them) and for that reason they are the key project variables

Question 8

Problems of using sensitivity analysis?

Answer 8

1- no rules to interpret the results , i.e how to differentiate between high and low sensitivity based on %change.

2- it does not provide a decision rules I.e it does not indicate the maximum acceptable levels of sensitivity.

3- it deals with changes in isolation , and tends to ignore intersections between variables. For example , advertising might alter the volume of output as well as influencing price, and price and volume are normally related

4- it assumes that specified changes persist through the project lifetime for example , a postulated 10% change in volume is projected for each year of operation. In reality, variations in key factors tend to fluctuate randomly.

5 - it may reveal factors over in which managers have no control. Thus it does not offer any guide to action,nonetheless ,it may still help to clarify the risks to which project is exposed.