[Variables 1Min Max -10 20 30 4 6 7 80 90100110 120 -30-40-150 160-70 180-90 200

Question

[Variables 1Min Max -10 20 30 4 6 7 80 90100110 120 -30-40-150 160-70 180-90 2001 NPVNPV Annual Benefits 30 160 50 170 40 150 70 120 100 120 110 120 First Cost Annual Costs Salvage 2. Consider the Tornado graph above where N is the project study period (lifetime) and I is the interest rate. First cost is the initial investment. Annual benefits, annual costs and salvage are self explanatory. 5 points each. Which variable has the most effect on NPV when that variable is altered over its anticipated range of uncertainty? a. Which variable has the least effect on NPV when that variable is altered over its anticipated range of uncertainty? b. Considering the sensitivity of the proposed project, what would you assess about the economic attractiveness of this project? Give your rationale c. Considering the six variables studied during sensitivity analysis, explain specifically how you would do a worst case analysis for this proposed project. d.

Explanation / Answer

a)

The range for NPV is maximum for Annual benefits which is 160 – 30 = 130. So Annual benefits has the most effect when it is altered over its range of uncertainty.

b)

The least effect on NPV is by the variable Salvage value whose effect is : 120 – 110 =10

c)

In assessing the economic attractiveness we would assume the most likely value and may also do simulation to understand its economic attractiveness.

d)

In doing a worst case analysis we will take those values of the variable for all the 6 variables which produces the lower NPV. So after inputting the lower NPV generating value for all the 6 variables, we will calculate the NPV of the project which will give the absolute minimum NPV attainable.

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