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

Understanding financial metrics and business risk, Controlling is an essent...

Controlling is an essential management function as efficient control mechanisms ensure that the performance of the company increases over time through the incorporation of feedback

Inventory management, A computer products store stocks color graphics monit...

A computer products store stocks color graphics monitors, and the daily demand is normally distributed with a mean of 1.6 monitors and a standard deviation of 0.4 monitor. The lead

Integration of economic, a) Globalisation refers to the interdependence and...

a) Globalisation refers to the interdependence and integration of economic, social and politic issues (services, goods, people and capital), across the world. For example, consumer

How will you conclude the cost of capital, Q. How will you conclude the cos...

Q. How will you conclude the cost of capital from different sources? Ans. Implication of Cost of Capital: - Cost of capital of a firm is the least rate of return expected by it

Limitations of the cash flow yield measure, Bond's potential re...

Bond's potential returns are calculated using measures like Yield to Maturity (YTM) and cash flow yield. Both these measures are not free from s

Engagement completion document, Engagement Completion Document - A document...

Engagement Completion Document - A document whereby AUDITOR identifies all significant findings or issues. Document must be as specific as essential in the circumstances for a revi

Bootstrapping, In bootstrapping method, on-the-run treasury issues ar...

In bootstrapping method, on-the-run treasury issues are used as they are fairly priced, and there is no credit risk or liquidity risk involved. In practice observed yie

Specifications for contracts, S pecifications Following are the variou...

S pecifications Following are the various specifications that we need to apply while creating contracts. If the goods to be procured are covered under Bureau of Indian

Dividend policy, the managing directors of three profitable listed companie...

the managing directors of three profitable listed companies discussed their company''''s dividend policies. company A has deliberately paid no dividends for the past five years. co

Average of relatives method, Average of Relatives Method We have seen ...

Average of Relatives Method We have seen the construction of an index number using the aggregates method. In this section, we shall see the construction of an index using the

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