Sensitivity Analysis

Year 0
Year 1-12
Tk.5400000
Tk.16,000,00
0
13,000,000
2,000,000
450,000
550,000
220,000
330,000
450,000
780,000
780,000
Tk.5400000

Investment
1. Sales
2. Variable Costs
3. Fixed Costs
4. Depreciation
5. Pretax Profit (1-2-3-4)
6. Taxes (at 40%)
7. Profit after tax
8. Depreciation
9. Cash flow from operation
10.Net Cash flow

1. Change in investment from Tk.5,400,000 to Tk.6,200,000

Investment

-Tk.6,200,000

Sales
Variable Cost
Fixed Costs
depreciation
Pretax Profit
Taxes @ 40%
Profit After Tax
depreciation
Cash flow from operation
PV = 806667.67*12-year annuity factor

Tk.16,000,00
0.00
13,000,000.
00
2,000,000.0
0
516,666.67
483,333.33
193,333.33
290,000.00
516,666.67
806,666.67

= 806667.67*7.536
= Tk.6079102.934
NPV = PV investment
= 6079102.934 6200000
= -Tk.120,897
Comment:
The above scenario indicates, a small rise in investment amount negatively effects the Net
Present value i.e. a rise of 14.8% or Tk.800000 in investment will reduce NPV from Tk.478000
to -Tk.120897 which makes the project unacceptable under the accept/reject criteria of NPV.
2. Change in sales from Tk.1,600,000 to Tk.1,400,000
Investment
Sales
Variable Cost
Fixed Costs

-Tk.5400000
Tk.14,000,00
0.00
11,375,000.
00
2,000,000.0
0

depreciation
Pretax Profit
Taxes @ 40%
Profit After Tax
depreciation
Cash flow from operation
PV = 555,000.00*12-year annuity factor

450,000.00
175,000.00
70,000.00
105,000.00
450,000.00
555,000.00

= 555,000.00*7.536
= Tk.4182523.299
NPV = PV investment
= Tk.4182523.299 Tk.5400000
= -Tk. 1,217,476
Comment:
The above analysis shows, a decrease in sales affects the Projects NPV. A decrease of 12.5%
in sales will significantly decrease the NPV from Tk.478000 to -Tk. 1,217,476 thus the project
losses its acceptability.
3. Change in variable cost from 81.25% to 83%
Investment

-Tk.5400000

Sales
Variable Cost
Fixed Costs
depreciation
Pretax Profit
Taxes @ 40%
Profit After Tax
depreciation
Cash flow from operation
PV = 612,000.00*12-year annuity factor

Tk.16,000,00
0.00
13,280,000.
00
2,000,000.0
0
450,000.00
270,000.00
108,000.00
162,000.00
450,000.00
612,000.00

= 612,000.00*7.536
= Tk.4612079.746
NPV = PV investment
= Tk.4612079.746 Tk.5400000
= -Tk.787920
Comment:
The above scenario shows that an increase in variable cost also makes the NPV negative. The
rise in variable cost significantly reduces the NPV to -Tk.787920 as a result the project
becomes unacceptable under unfavorable condition.
4. Change in Fixed cost from Tk.2000,000 to 2,100,000
Investment
Sales

-Tk.5400000
Tk.16,000,00
0.00

13,000,000.
00
2,100,000.0
0
450,000.00
450,000.00
180,000.00
270,000.00
450,000.00
720,000.00

Variable Cost
Fixed Costs
depreciation
Pretax Profit
Taxes @ 40%
Profit After Tax
depreciation
Cash flow from operation
PV = 720,000.00*12-year annuity factor
= 720,000.00*7.536
= Tk.5425976
NPV = PV investment
= Tk.5425976 Tk.5400000
= Tk.25976
Comment:

The above scenario indicates an increase of 5% in Fixed cost reduces the by the amount of Tk.
452,024. Although it reduces the NPV by a significant amount the NPV still remains positive
i.e. the project remains acceptable under the accept/reject criteria of NPV.

5. Change in discount rate from 8 % to 9%

Investment

-Tk.5400000

Sales
Variable Cost
Fixed Costs
depreciation
Pretax Profit
Taxes @ 40%
Profit After Tax
depreciation
Cash flow from operation
PV = 780,000.00*12-year annuity factor
= 780,000.00*7.161
= Tk.5585366
NPV = PV investment
= Tk.5585366 Tk.5400000
= Tk. 185,366
Comment:

Tk.16,000,00
0.00
13,000,000.
00
2,000,000.0
0
450,000.00
550,000.00
220,000.00
330,000.00
450,000.00
780,000.00

Under the above condition an increase in discount rate reduces the NPV by the amount of Tk.
292,634. Though it reduces NPV but according to the accept/reject criteria of NPV the project
is still acceptable.
6. Change in investment life from 12 years to 11 years
Investment

-Tk.5400000

Sales
Variable Cost
Fixed Costs
depreciation
Pretax Profit
Taxes @ 40%
Profit After Tax
depreciation
Cash flow from operation

Tk.16,000,00
0.00
13,000,000.
00
2,000,000.0
0
490,909.09
509,090.91
203,636.36
305,454.55
490,909.09
796,363.64

PV = 796,363.64*12-year annuity factor

= 796,363.64*7.139
= Tk. 5,685,212
NPV = PV investment
= Tk.5685212 Tk.5400000
= Tk. 285,212
Comment:
The above scenario indicates the change in investment life negatively affect the projects
cash flows. Lowering the projects life reduces the NPV by the amount of Tk.492778. Although
the NPV has been reduced but the project is still acceptable under the accept reject criteria of
NPV.

Overall analysis on the project

The Projects NPV is affected differently under different scenarios. Depending on the type and
amount of change in the variables the NPV shows different values ranging from positive to
negative. Negatives changes in the variables significantly affect the NPV. Negative changes in
investment, sales & variable cost has made the project unacceptable under the accept/reject
criteria of NPV as all these variables shows significant negative NPV and the values are -Tk.
120,897, -Tk. 1,217,476, -Tk.787920 respectively where on the other hand, changes in fixed
cost, discount rate and projects life show positive NPV in spite of higher fixed cost, discount
rate and lower projects life. From the above calculation it indicates the most crucial variable
is Sales which shows a 12.5% drop in sales has significantly reduced the NPV compared to
other variables analyzed. Therefore the Sales variable has to be taken into consideration
seriously in order to reduce the future risk and return.