Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 26: Q29RQ (page 1464)

How can spreadsheet software, such as Excel, help with sensitivity analysis?

Short Answer

Expert verified

All investing is probabilistic because it is impossible to know with certainty what will occur in 5, 10, or 15 years, but it is possible to provide a realistic range of prospective outcomes, so that investors can change their assumptions in a model and examine the output under various alternative scenarios by using sensitivity analysis in Excel or other spreadsheet program.

Step by step solution

01

Definition

Sensitivity analysis is the examination of several causes of uncertainty in model input might be allocated to the uncertainty in the model's output, whether it is numerical or not.

02

Advantages

Sensitivity analysis provides decision-makers with various outcomes to aid in better commercial decision-making. Predictions are more accurate because they thoroughly analyze the factors that influence them.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

You are planning for a very early retirement. You would like to retire at age 40 and have enough money saved to be able to withdraw \(215,000 per year for the next 40 years (based on family history, you think you will live to age 80). You plan to save by making 10 equal annual installments (from age 30 to age 40) into a fairly risky investment fund that you expect will earn 10% per year. You will leave the money in this fund until it is completely depleted when you are 80 years old.

Requirements

1. How much money must you accumulate by retirement to make your plan work? (Hint:Find the present value of the \)215,000 withdrawals.)

2. How does this amount compare to the total amount you will withdraw from the investment during retirement? How can these numbers be so different?

What is capital rationing?

You are planning for early retirement. You would like to retire at age 40 and have enough money saved to be able to withdraw \(220,000 per year for the next 30 years (based on family history, you think you will live to age 70). You plan to save by making 20 equal annual instalments (from age 20 to age 40) into a fairly risky investment fund that you expect will earn 8% per year. You will leave the money in this fund until it is completely depleted when you are 70 years old.

Requirements

1. How much money must you accumulate by retirement to make your plan work? (Hint: Find the present value of the \)220,000 withdrawals.)

2. How does this amount compare to the total amount you will withdraw from the investment during retirement? How can these numbers be so different?

Hayes Company is considering two capital investments. Both investments have an initial cost of \(10,000,000 and total net cash inflows of \)17,000,000 over 10 years. Hayes requires a 12% rate of return on this type of investment. Expected net cash inflows are as follows:

Year

Plan Alpha

Plan Beta

1

\( 1,700,000

\) 1,700,000

2

1,700,000

2,300,000

3

1,700,000

2,900,000

4

1,700,000

2,300,000

5

1,700,000

1,700,000

6

1,700,000

1,600,000

7

1,700,000

1,200,000

8

1,700,000

800,000

9

1,700,000

400,000

10

1,700,000

2,100,000

Total

\( 17,000,000

\) 17,000,000

Requirements

  1. Use Excel to compute the NPV and IRR of the two plans. Which plan, if any, should the company pursue?

  2. Explain the relationship between NPV and IRR. Based on this relationship and the company’s required rate of return, are your answers as expected in Requirement 1? Why or why not?

  3. After further negotiating, the company can now invest with an initial cost of $9,500,000 for both plans. Recalculate the NPV and IRR. Which plan, if any, should the company pursue?

Hudson Manufacturing is considering three capital investment proposals. At this time, Hudson only has funds available to pursue one of the three investments.

Equipment A

Equipment B

Equipment C

Present value of net cash inflows

\(1,647,351

\)1,969,888

\(2,064,830

Initial investment

(1,484,100)

(1,641,573)

(1,764,812)

NPV

\)163,251

\(328,315

\)300,018

Which investment should Hudson pursue at this time? Why?
See all solutions

Recommended explanations on Business Studies Textbooks

Organizational Behavior

Read Explanation

Strategic Analysis

Read Explanation

Change Management

Read Explanation

Organizational Communication

Read Explanation

Strategic Direction

Read Explanation

Human Resources

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free