Module 14B
TEXT SENSITIVITY ANALYSIS
OBJECTIVE:
This program provides a solution for the sensitivity analysis discussed in Chapter 14. It is very similar to
Module 13F. There are two major differences between Module 13F and this module:
1) Certain costs have been combined
a) Production and distribution costs
b) G & A and advertising expenses
c) Fixed G & A expenses and depreciation
2) Two columns have been added: Sensitivity factor and New Constant. These two inputs are helpful in
performing sensitivity analysis. In the example, the sensitivity factor inputs have been recorded as 1.00.
If the analyst wishes to inquire about the result of, e.g., a 10% increase in any of the lines, the factor is
to be changed to 1.1. This automatically adjusts the data in the New Constant column and all the
annual data in that line. New NPV and IRR are calculated for each change.
INPUTS (WILL APPEAR IN BLUE):
1) First period sales (actually year 2) for the market as a whole in cell H61.
2) Annual growth rate of market -- this is a constant percent by which
market will grow over the next 5 periods. Enter as a decimal in cell C61.
3) The company's share of the market (entered as decimals) for each
of the years, in cells H62 - M62.
4) Capital expenditures and additional working capital for years 0 and 1
in cells F65 - G65 and F66 - G66. Enter as negative numbers.
5) Tax deductible start up expenses in cell C67. Enter as a negative number.
6) Sales price per unit in cell C69.
7) Product cost and distribution costs in cell C71.
8) Variable general and administrative expenses and advertising expenses
as a percent of sales (enter as decimal) in cell C72.
9) Fixed expenses (including depreciation) in cells H73 - M73.
Here, unlike in Module 15C, the annual depreciation expenses are to
be entered for each year together with other fixed expenses. This
was done to simplify this program.
10) The income tax rate in cell C78 (as a decimal).
11) Enter the original cost of land in cell C86. If end-of-project
market value is different, enter the appropriate factor in cell D86.
A factor of 1.1 means that market value is 110% of original cost.
12) Enter the end-of-project book value of plant and equipment in cells
C87 and C88, respectively. If the market value is different from
the book value, enter the appropriate factor in cells D87 and D88.
A factor of 1.1 means that market value is 110% of the book value.
13) A factor of 1.00 for ending working capital is correct if the amount
equals the original working capital investment. If not, change the
sensitivity factor in cell D89.
14) The project's required rate of return (cost of capital) in cell C93
(entered as a decimal).
Sample data have been entered as an example.
Sensitiv. New
Constant
Factor Constant YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7
Total Market 4.0% 1.00 4.0% 100000 104000 108160 112486 116986 121665
Market share 1.0% 2.0% 3.0% 4.0% 5.0% 5.0%
Company sales 1.00 1.00 1.00 1000 2080 3245 4499 5849 6083
Expenditures -5000 -2000
Working capital -750
Start-up expense 750 1.00 750 -450
Sales 5.00 1.00 5.00 5000 10400 16224 22497 29246 30416
Prod.& dist.cost 3.10 1.00 3.10 3100 6448 10059 13948 18133 18858
Variable expenses 8.0% 1.00 8.0% 400 832 1298 1800 2340 2433
Fixed costs 1031 1361 1121 1001 911 881
Total Cost & Exp. 4531 8641 12478 16749 21384 22172
NEBT 469 1759 3746 5748 7863 8244
Income tax 40.0% 1.00 40.0% 188 704 1498 2299 3145 3298
NEAT 281 1055 2248 3449 4718 4946
Add Depr. 531 861 621 501 411 381
Oper. Cash Flow 812 1916 2869 3950 5129 5327
Remaining values
Land 500 1.00 500 500
Plant 2833 1.00 2833 2833
Equipment 360 1.00 360 360
Working capital 1.00 0.80 0.80 660
Total Cash Flow -5000 -3200 812 1916 2869 3950 5129 9680
Net Present Value 15.0% 3552
IRR 24.2%