It is an equal sum of money to be paid in each period forever. The timing of cash flows are important in new investment decisions and so the chapter looks at this "payback" concept. Note that net annual profit excludes depreciation. The earlier the money is received, the greater the potential for increasing wealth. This rate means that the present value of the cash inflows for the project would equal the present value of its outflows. It helps in assessing risk. It does this by examining the techniques of net present value, internal rate of return and annuities. In second round, we evaluate sensitivity for another input say cash flows growth rate while keeping the rest of inputs constant.

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Video: Sensitivity analysis evaluates the npv with respect to the cold SENSITIVITY ANALYSIS

Sensitivity analysis evaluates the NPV with respect to: A) changes in the. Chapter 8 Strategy and Analysis in Using Net Present Value Multiple in a new cold weather starting system for fuel injected cars.

t=0 Success.6 Test Sensitivity analysis evaluates the NPV with respect to A) changes in the. Sensitivity Analysis. Example.

Given the expected cash flow forecasts for future 12 years listed on the next slide, determine the NPV of the project given changes.

The payback period PP The CIMA defines payback as 'the time it takes the cash inflows from a capital investment project to equal the cash outflows, usually expressed in years'. Inflation may be general, that is, affecting prices of all kinds, or specific to particular prices.

The subject matter is difficult to grasp by nature of the topic covered and also because of the mathematical content involved.

The classification of investment projects a By project size Small projects may be approved by departmental managers.

These guesses will probably be wrong, at least to some extent, as it is extremely difficult to forecast the rate of inflation accurately.

31) Natick Nurseries has used scenario analysis to evaluate the purchase of a result in an NPV of $, if the winter weather is exceptionally cold and wet, A) Ted's Variety Store broke even with respect to net income.

build another grain silo, cotton gin or cold store or invest in a new distribution depot. More careful analysis and Board of Directors' approval is needed for large The NPV method is used for evaluating the desirability of investments or projects.

Attempt the calculation without reference to net present value tables first.

Sensitivity analysis differs from scenario analysis in that scenario analysis is more complex because it allows us to change more than one variables at once.

## Chapter 6 Investment decisions Capital budgeting

Thus we can compute the future value of what V o will accumulate to in n years when it is compounded annually at the same rate of r by using the above formula. Provisions should also be made to have access to 'contingency funds' should the rate of inflation exceed expectations, e. At present, there is very little measure of agreement as to the best approach to the problem of 'accounting for inflation'.

Example: Agritex is considering building either a one-storey Project A or five-storey Project B block of offices on a prime site. Lending is only worthwhile if the return is at least equal to that which can be obtained from alternative opportunities in the same risk class.

## shidafzan Financial Management (Chapter 13 Risk Analysis and Project Evaluation)

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At a lower level, marketers may wish to evaluate whether to spend more on advertising or increase the sales force, although it is difficult to measure the sales to advertising ratio.
The discount factor r can be calculated using: Examples: N. The last point g is crucial and this is the subject of later sections of the chapter. What price PV should you be willing to pay for this income? Mathematical proof: for a project to be acceptable, the NPV must be positive, i. |

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