Explain the sensitivity analysis of burley plc, Financial Management

Assignment Help:

Sensitivity analysis

A sensitivity analysis studies the impact of specified variations in key factors on the initially-calculated NPV. The initial point for a sensitivity analysis is the NPV using the most likely value or best estimate for each key variable. Taking the resultant base case NPV as a reference point the aim is to identify those factors which have the greatest impact on the profitability of the project if their realised values deviate from expectations. This intellect signals to managers where they should arrange to focus resources in order to secure favourable outcomes. Problems with sensitivity analysis comprise the following

- It deals with changes in isolation as well as tends to ignore interactions between variables. For instance advertising may alter the volume of output as well as influencing price and price and volume are usually related.

- It assume that specified changes persist all through the project lifetime - example a postulated l0% change in volume may be projected for each year of operation. Actually variations in key factors tend to fluctuate randomly.

- It may perhaps reveal as critical factors over which managers have no control thus offering no guide to action. However it may still help to clarify the risks to which the project is exposed.

- It doesn't provide a decision rule example it doesn't indicate the maximum acceptable levels of sensitivity.

- It provides no indication of the likelihood of the variations under consideration. Difference in a factor which is potentially devastating but has a minimal chance of occurring provide little cause for concern.

 


Related Discussions:- Explain the sensitivity analysis of burley plc

Calculated betas provide different information, Calculated betas provide di...

Calculated betas provide different information if they are obtained by using daily, weekly or monthly data. Which data is the most appropriate? Fernández and Carabias (2007) an

Calculate the required return - maintenance & other expense , An asset need...

An asset needed by the ABC Corp. can be purchased for $100,000.  Maintenance and other ownership expenses will total $20,000 each year for the asset's expected 10-year life. On the

Securities analysis, 7. Bill Peters is the investment officer of a $60 mill...

7. Bill Peters is the investment officer of a $60 million pension fund. He has become concerned about the big price swings that have occurred lately in the fund’s fixed income sec

Re-order point - technique of inventory management, Q. Re-order point - tec...

Q. Re-order point - technique of inventory management? Re-order point: - The re-order point is that stock level at which an order should be placed. Mutually the excessive and i

Example on compound value of the single flow, Q. Example on compound value ...

Q. Example on compound value of the single flow? Mr. X invests Rs. 1000 at 10% is compounded yearly for three years. Compute value after three years. FV = PV (1+i) n FV

Special bond structures, Special bond structures are the municipal se...

Special bond structures are the municipal securities bearing special security structures. They are of two types - insured bonds and pre-refunded bonds.

Deefine market price of a bond be influenced, If all other things held cons...

If all other things held constant, how would the market price of a bond be influenced if coupon interest payments were made semiannually in place of annually? Several bonds iss

Role of primary dealers, Role of Primary Dealers To promote the investm...

Role of Primary Dealers To promote the investment activity in the Government Securities market, several countries have adopted licensed Primary Dealers (PDs) as important inter

Evaluate return on capital employed, a) Gross profit = $500,000 and Expense...

a) Gross profit = $500,000 and Expenses = $100,000 for Year 2. b) Year 2 GPM = $500k / $1,000k = 50.0% Year 1 GPM = $400k / $850k = 47.05% Year 2 NPM = $400k / $1,000k =

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd