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arman90fy says

Hello Sir,

why lower the sensitivity—> the more worried about item.? how about the higher sensitivity, is the higher sensitivity more optimal? could u plz explain it again. thanks

John Moffat says

Its not really a question of calling it the optimum.

The problem is that we are making a decision on forecasts of cash flows, and therefore the actual cash flows may turn out to be different – if they are different then the NPV might turn out to be negative and then we will have made the wrong decision.

The higher the sensitivity the less the chance is of that flow changing enough to affect the decision. However if the sensitivity is low, then it means that even just a small change in the flow will affect the decision. Therefore the lower the sensitivity the more risk we are taking and therefore the more we will try to estimate the flow accurately (or else maybe decide not to take the risk).

arman90fy says

great explanation dear sir

thanks alot

izhar says

Sir if calculation of tax given then how we calculate present value of relevant cash flow ?

jay0v says

Thank you sir!

jay0v says

Sir, will the requirements be given in exam asking us which sensitivity to calculate, the initial investment, sales volume, selling price, etc.?

John Moffat says

Yes certainly:-)

If the question wants the sensitivity then it will specify of what.