Sensitivity Analysis & Types of Interests (Yasir Azeem's conflicted copy 2013-12-18).pptx

7/27/2019 Sensitivity Analysis & Types of Interests (Yasir Azeem's conflicted copy 2013-12-18).pptx

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Financial Planning Is Not JustForecasting


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What-if Questions

Companies have developed a number of waasking what-if questions


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Typical What-If Questions:

A number of techniques have been developed to help identify the key assumptions in their analysis. These teinvolve asking a number of what-if questions.

What if your market share turns out tohigher or lower than you forecast?

What if interest rates rise during th


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SoUncertainty means that more things CANHAPPWILLHAPPEN.


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But Mr. Mitterrand, have you though


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SENSITIVITYANALYSTYPESOFINTEREST

PRESENTEDBY2010-CH-01 2010-CH-19 2010-CH-7

2010-CH-123


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Whenever managers are cash-flow forecast, they

determine what else mighand the implications opossible events. This iSENSITIVITYANALYSIS.


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DEPRECIATION

What is truedepreciation? It is the amount that the firm simply to offset any deterioration in its assets.

The purpose of depreciation is to allocate the original cosover its life, and the rules governing the depreciation of asnot reflect actual loss of market value.

As a result, the book value of fixed assets often is muchthe market value, but often it is less.


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CASHFLOWS

THEMOVEMENTOFMONEYINTOANDOUTOFA

But since cash flows rarely proceed as anticipated

constantly need to modify their operations.If cash flows are better than anticipated, the project may b

if they are worse, it may be scaled back or abandoned alto


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CASESTUDY Finefodder is considering opening a new superstore in Grav

The figures are fairly typical for a new supermarket, except that to kesimple we have assumed

I. NOINFLATION.

II. We Have Also Assumed That The Entire Investment Can Be DSTRAIGHT-LINEFORTAXPURPOSES,

III. We Have Neglected The WORKINGCAPITALREQUIREME

&


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CASH-FLOWFORECASTSFORFINEFODDERSNEWSUPERSTOR


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SensitivityAnalysis]As an experienced financial manager, you recognize immethese cash flows constitute an annuity and therefore you cal

present value by multiplying the $780,000 cash flow by the 1annuity factor,

Subtract the initial investment of $5.4 million

Obtain a net present value of $478,000:


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COSTCONSIDERATIONSONSALES

Before you agree to accept the project, however, you want to delve

forecasts ANDIDENTIFYTHEKEYVARIABLESthat will determproject succeeds or fails.


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. The new superstores variable costs are estimated at 81.2sales. Thus.

The initial investment of $5.4 million will be depreciated onbasis over the 12-year period, resulting in annual depreciat$450,000.

Profits are taxed at a rate of 40 percent.

COSTCONSIDERATIONSONSALES


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INFERRED;

These seem to be the important things you need to but look out for things that may have been forgottenPerhaps you will need to undertake costly landscap

Or

PERHAPSTHEREWILLBEDELAYSINOBTAININPLANNINGPERMISSION


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NPVCALCULATIONS:Next you see what happens to NPV under the optimistic

forecasts for each of these variables. You recalculate projethese various forecasts to determine which variables are mNPV.


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Sensitivity Analysis forSuperstore Project


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Sensitivity Analysis

The right-hand side of Table 5.2 shows the projects net present value if variables are setone at a time to their optimistic and pessimistic values. example, if fixed costs are $1.9 million rather than the forecast $2.0 milliannual cash flows are increased by (1tax rate) ($2.0 million$1.9 m.6 $100,000 = $60,000. If the cash flow increases by $60,000 a year foyears, then the projects present value increases by $60,000 times the 1

annuity factor, or $60,000 7.536 = $452,000. Therefore, NPV increasesthe expected value of $478,000 to $478,000 + $452,000 = $930,000, asin the bottom right corner of the table. The other entries in the three coluthe right in Table 5.2 similarly show how the NPV of the project changes each input is changed. Your project is by no means a sure thing. The priuncertainties appear to be sales and variable costs. For example, if sale

only $14 million rather than the forecast $16 million (and all other foreca


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Limits to Sensitivity Analysis

I. Of course, there is no law stating which vashould consider in your sensitivity analysis. Foyou may wish to look separately at labor costs anof the goods sold. Or, if you are concerned aboutchange in the corporate tax rate, you may wish toeffect of such a change on the projectsNPV.


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II. One drawback to sensitivity analysis is that it giveambiguous results. For example, what exactly does pessimistic mean? One department may be interpreting different way from another. Ten years from now, afterprojects, hindsight may show that one departments pe

was exceeded twice as often as the others; but hindsigyou now while youremaking the investment decision.



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III. Another problem with sensitivity analysis is that the uvariables are likely to be interrelated. For exampleexceed expectations, demand will likely be stronger anticipated and your profit margins will be wider. Or, are higher than your forecast, both variable costs a

costs are likely to be at the upper end of your range. of these connections, you cannot push one-at-a-time sanalysis too far.



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Albert Einstein reportedly called

compound interest mankind's "greatest

invention."

Albert Einstein


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Interest which is calculated not only on the initial

principal but also the accumulated interest of prio

periods.

Compound interest can be thought of as inte

on interest,

OR

COMPOUNDINTEREST


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The formula for calculating the compound interest is:

Where:F = future valueP = initial depositr = interest rate (expressed as a fraction: e.g.. 0.06 for 6%)n = # of times per year interest is compoundedt = number of years invested

F = P(1+ r/n)nt


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Savings accounts

Credit cards

Loans

Compounded for daily, quarterly (4 times a year) , semi-annually

year), or annually (once a year)

Applies On..


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FACTORSAFFECTINGCOMPOUNDIN

Interest Rate

Duration

Initial Amount


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Interest Rate More is the Interest rate (r) more is the

future amount

Initial Amount

More is the principal amount (P) for deposit more is

the future amount

Compounding Frequency

More is the compounding frequency (n) for depo

is the future amount


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Compounding DifferentInterest Rates


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Case Study(i)

If you start a bank account with amount $10,000

bank compounds the interest quarterly at an inter

8%, how much money do you have at the 5th ye

(assume that you do not add or withdraw any m

the account)GIVEN DATA

P= $10,000 R= 0.08 N= 4 T= 5 years


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F = 10000 (1+(.08/4))^(4*5)

F = 10000 (1+0.02)^(20)

F = 10000 (1.02)^(20)

F = 10000 (1.4859)

F = $ 14859.47

So the future amount will be 14859.47 dollars a


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How much money would you need to deposit today at

annual interest compounded monthly to have $12,000

account after 6 years?

GIVEN DATA

F= $12,000

R= 0.09

T= 6 years

Case Study(ii)


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12000 = P (1+(.09/12))^(12*6)

12000 = P (1+0.0075)^(72)

12000 = P (1.0075)^(72)

12000 = P (1.7125)P= $ 7007.3

So the principle amount should be 7007.3 d


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If you deposit $5000 into an account paying 6% a

interest compounded monthly, how long until tha

amount becomes double in the account?

GIVEN DATA

P = 5000 F = 10000 N = 12

R = 0.06

Case Study(iii)


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t 11.6 months

10000 = 5000 (1+(.06/12))^(12t)2 = (1+0.005)^(12t)

2 = (1.005)^(12t)

Taking logarithm on both sides

Log(2)= 12t * log(1.005)0.301 = (12*0.00216) * t

So it will take about 11.6 months to make the amou


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c. Compound interest formula contains exponent while simpleinterest has linear multiplication.

a. Compound interest can be paid month or day basisalso.But simple is paid after one year.

Simple vs. Compound

b. Compound interest makes a deposit or loan grow faster rate than simple interest, which is inte

calculated only on the principal amount.


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Compound Interes


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WHATISINTEREST?


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INTERESTRATE


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2-Types Of Interest

Interest

CompounInterest

SimpleInterest


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SIMPLEINTEREST

A type of interest wherein only the original principal interest for the duration of the term


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F l


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Formula


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Triangle Formula


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Future Value

Future Value is the value at some future time present amount of money, or a series of paymevaluated at a given interest rate.

FV= P+ SI


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Case Study 1

A chemical plant is to be installed by an XYZ comp

The Loan is taken from the bank.

Find the interest earned after 3 years if Principal

Amount 12,000 is deposited in a savings account w

earns 5% simple interest.


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Given Data:

Principal Amount = 12000

Time = 3 Years

Interest Rate = 5 %


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Case Study 2

How long will it take a Php30,000 debt to earn aninterest of Php4,500 if the simple interest being

charged is 9%?

tIs

Pr

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Sensitivity Analysis & Types of Interests (Yasir Azeem's conflicted copy 2013-12-18).pptx