Sensitivity Analysis is a way of analysing change in the project's NPV for a given change in one of the
variables affecting the NPV. It indicates how sensitive the NPV is to changes in particular variables.
The more sensitive the NPV, the more critical the variable.
Kavungya answered the question on April 13, 2021 at 09:20
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State the demerits of certainty equivalent approach.
Date posted: April 13, 2021. Answers (1)
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State the merits of certainty equivalent approach.
Date posted: April 13, 2021. Answers (1)
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Compute the NPV of the project(Solved)
Assume a project costs Sh 30,000 and yields the following uncertain cash flows:
Year Cash flow
1 12,000
2 14,000
3 10,000
4 6,000
Assume also that the certainty equivalent coefficients have been estimated as follows:
α0 = 1.00
α1 = 0.90
α2 = 0.70
α3 = 0.50
α4 = 0.30
The risk-free discount rate is given as 10%
Required
Compute the NPV of the project
Date posted: April 13, 2021. Answers (1)
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Date posted: April 13, 2021. Answers (1)
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Date posted: April 13, 2021. Answers (1)
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Date posted: April 13, 2021. Answers (1)
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Date posted: April 13, 2021. Answers (1)
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value) has also been given.(Solved)
Project A has the following cashflows over its useful life of 3 years. The market value (Abandonment value) has also been given.
Year Cash Abandonment
flow value
Sh`000' Sh`000'
0 (4,800) 4,800
1 2,000 3,000
2 1,875 1,900
3 1,750 0
Required:
Determine when to abandon the project assuming a discount rate of 10%.
Date posted: April 13, 2021. Answers (1)
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Management is faced with eight projects to invest in. The capital expenditures during the year has been rationed to Sh 500,000 and the projects have equal risk and therefore should be discounted at the firm's cost of capital of 10%.
Required:
Determine the optimal investment sets.
Date posted: April 13, 2021. Answers (1)
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A company is considering two mutually exclusive projects requiring an initial cash outlay of Sh 10,000 each and with a useful life of 5 years. The company required rate of return is 10% and the appropriate corporate tax rate is 50%. The projects will be depreciated on a straight line basis. The before depreciation and taxes cash flows expected to be generated by the projects are as follows.
Required:
Calculate for each project
i. The payback period
ii. The average rate of return
iii. The net present value
iv. Profitability index
v. The internal rate of return
Which project should be accepted? Why?
Date posted: April 13, 2021. Answers (1)
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Date posted: April 13, 2021. Answers (1)
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Date posted: April 13, 2021. Answers (1)
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Two neighbouring countries have chosen to organize their electricity supply industries in different ways. In
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electricity supplies are provided by a number of private sector companies.
Required:
(a) Explain how the objectives of the nationalized industry in country A might differ from those of the private sector companies in country B.
(b) Briefly discuss whether investment planning and appraisal techniques are likely to differ in the nationalized industry and private sector companies.
Date posted: April 13, 2021. Answers (1)
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