Sensitivity Analysis (OT)

Question 1

Issue with wrong estimates?

Answer 1

We’ve potentially made the wrong decision, CASH FLOW IS NEVER CERTAIN

Question 2

Is sensitivty analysis a cash flow estimate method?

Answer 2

Yes

Question 3

What is contribution?

Answer 3

Revenue - variable costs

Question 4

What is measured in sensitivity?

Answer 4

The % change in cash flow that results in NPV of zero

Question 5

If sales volume fell by 10%?

Answer 5

PV and contribution will also fall by 10%

Question 6

What does sales volume mean?

Answer 6

if it goes over the sales volume % calculated, project isn’t accepted

Question 7

How to calculate sales volume?

Answer 7

NPV / PV of flows affected

Question 8

When is scrap value relevant?

Answer 8

We have to pay to scrap the machine, making the scrap balance negative

Question 9

How to calculate cost of capital?

Answer 9

Use IRR

Question 10

When are we worried about cost of capital?

Answer 10

When it increases

Question 11

Benefit of sensitivity?

Answer 11

identify the critical areas are. Cannot eliminate uncertainty.

Question 12

Smaller % in sensitivity?

Answer 12

Makes it more risky, needs more attention. The more critical the factor

Question 13

Disadvantage of sensitivity?

Answer 13

Two factors could change at once (contribution could change sales volume), we can only look at one factor at a time.