Lecture 5 - Sensitivity Analysis Lecture Example
Lecture 5 - Sensitivity Analysis Lecture Example
Sensitivity Analysis
SENSITIVITY FORMULA:
Sensitivity % = (NPV/PV of variable) x 100
VARIABLES:
1. INITIAL INVESTMENT:
Sensitivity % = (6,865/50,000)*100 = 13.73%
2. SELLING PRICE:
Sensitivity % = (6,865/189,550)*100 = 3.62%
3. MATERIALS:
Sensitivity % = (6,865/56,865)*100 = 12.07%
5. SALES VOLUME (DEMAND): (use PV of net cash flows (Sales – Variables cost))
Sensitivity % = (6,865/56,865)*100 = 12.07%
6. COST OF CAPITAL:
We know a 10% Cost of capital gives a +NPV of 6865
We therefore must guess a Cost of Capital which gives a negative NPV and interpolate
Sensitivity % = (15.7-10)/10*100=57%
The cost of capital can drop by 57%, up to 15.7% before the project is no longer viable