Embed Size (px)
DESCRIPTION
Sensitivity Analysis or Project Analysis
Citation preview
Sensitivity Analysis
Year 0 Year 1-12Investment -
Tk.54000001. Sales Tk.16,000,00
02. Variable Costs 13,000,0003. Fixed Costs 2,000,0004. Depreciation 450,0005. Pretax Profit (1-2-3-4) 550,0006. Taxes (at 40%) 220,0007. Profit after tax 330,0008. Depreciation 450,0009. Cash flow from operation 780,00010.Net Cash flow -
Tk.5400000780,000
1. Change in investment from Tk.5,400,000 to Tk.6,200,000
Investment -Tk.6,200,000
SalesTk.16,000,00
0.00
Variable Cost13,000,000.
00
Fixed Costs2,000,000.0
0depreciation 516,666.67Pretax Profit 483,333.33Taxes @ 40% 193,333.33Profit After Tax 290,000.00depreciation 516,666.67Cash flow from operation 806,666.67
PV = 806667.67*12-year annuity factor
= 806667.67*7.536
= Tk.6079102.934
NPV = PV – investment
= 6079102.934 – 6200000
= -Tk.120,897
Comment:
The above scenario indicates, a small rise in investment amount negatively effects the Net Present value i.e. a rise of 14.8% or Tk.800000 in investment will reduce NPV from Tk.478000 to -Tk.120897 which makes the project unacceptable under the accept/reject criteria of NPV.
2. Change in sales from Tk.1,600,000 to Tk.1,400,000
Investment -Tk.5400000
SalesTk.14,000,00
0.00
Variable Cost11,375,000.
00
Fixed Costs2,000,000.0
0depreciation 450,000.00
Pretax Profit 175,000.00Taxes @ 40% 70,000.00Profit After Tax 105,000.00depreciation 450,000.00Cash flow from operation 555,000.00
PV = 555,000.00*12-year annuity factor
= 555,000.00*7.536
= Tk.4182523.299
NPV = PV – investment
= Tk.4182523.299– Tk.5400000
= -Tk. 1,217,476
Comment:
The above analysis shows, a decrease in sales affects the Project’s NPV. A decrease of 12.5% in sales will significantly decrease the NPV from Tk.478000 to -Tk. 1,217,476 thus the project losses its acceptability.
3. Change in variable cost from 81.25% to 83%
Investment -Tk.5400000
SalesTk.16,000,00
0.00
Variable Cost13,280,000.
00
Fixed Costs2,000,000.0
0depreciation 450,000.00Pretax Profit 270,000.00Taxes @ 40% 108,000.00Profit After Tax 162,000.00depreciation 450,000.00Cash flow from operation 612,000.00
PV = 612,000.00*12-year annuity factor
= 612,000.00*7.536
= Tk.4612079.746
NPV = PV – investment
= Tk.4612079.746– Tk.5400000
= -Tk.787920
Comment:
The above scenario shows that an increase in variable cost also makes the NPV negative. The rise in variable cost significantly reduces the NPV to -Tk.787920 as a result the project becomes unacceptable under unfavorable condition.
4. Change in Fixed cost from Tk.2000,000 to 2,100,000
Investment -Tk.5400000
SalesTk.16,000,00
0.00Variable Cost 13,000,000.
00
Fixed Costs2,100,000.0
0depreciation 450,000.00Pretax Profit 450,000.00Taxes @ 40% 180,000.00Profit After Tax 270,000.00depreciation 450,000.00Cash flow from operation 720,000.00
PV = 720,000.00*12-year annuity factor
= 720,000.00*7.536
= Tk.5425976
NPV = PV – investment
= Tk.5425976– Tk.5400000
= Tk.25976
Comment:
The above scenario indicates an increase of 5% in Fixed cost reduces the by the amount of Tk. 452,024. Although it reduces the NPV by a significant amount the NPV still remains positive i.e. the project remains acceptable under the accept/reject criteria of NPV.
5. Change in discount rate from 8 % to 9%
Investment -Tk.5400000
SalesTk.16,000,00
0.00
Variable Cost13,000,000.
00
Fixed Costs2,000,000.0
0depreciation 450,000.00Pretax Profit 550,000.00Taxes @ 40% 220,000.00Profit After Tax 330,000.00depreciation 450,000.00Cash flow from operation 780,000.00
PV = 780,000.00*12-year annuity factor
= 780,000.00*7.161
= Tk.5585366
NPV = PV – investment
= Tk.5585366– Tk.5400000
= Tk. 185,366
Comment:
Under the above condition an increase in discount rate reduces the NPV by the amount of Tk. 292,634. Though it reduces NPV but according to the accept/reject criteria of NPV the project is still acceptable.
6. Change in investment life from 12 years to 11 years
Investment -Tk.5400000
SalesTk.16,000,00
0.00
Variable Cost13,000,000.
00
Fixed Costs2,000,000.0
0depreciation 490,909.09Pretax Profit 509,090.91Taxes @ 40% 203,636.36Profit After Tax 305,454.55depreciation 490,909.09Cash flow from operation 796,363.64
PV = 796,363.64*12-year annuity factor
= 796,363.64*7.139
= Tk. 5,685,212
NPV = PV – investment
= Tk.5685212– Tk.5400000
= Tk. 285,212
Comment:
The above scenario indicates the change in investment life negatively affect the project’s cash flows. Lowering the project’s life reduces the NPV by the amount of Tk.492778. Although the NPV has been reduced but the project is still acceptable under the accept reject criteria of NPV.
Overall analysis on the project
The Project’s NPV is affected differently under different scenarios. Depending on the type and amount of change in the variables the NPV shows different values ranging from positive to negative. Negatives changes in the variables significantly affect the NPV. Negative changes in investment, sales & variable cost has made the project unacceptable under the accept/reject criteria of NPV as all these variables shows significant negative NPV and the values are -Tk. 120,897, -Tk. 1,217,476, -Tk.787920 respectively where on the other hand, changes in fixed cost, discount rate and project’s life show positive NPV in spite of higher fixed cost, discount rate and lower project’s life. From the above calculation it indicates the most crucial variable is Sales which shows a 12.5% drop in sales has significantly reduced the NPV compared to other variables analyzed. Therefore the Sales variable has to be taken into consideration seriously in order to reduce the future risk and return.
