Sensitivity Analysis

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    Accountaholic
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    Sir how can I calculate sensitivity analysis for cost of capital?
    Say Cost of capital 8%, IRR 18%, NPV $1024
    (Ans: Cost of capital an increase by 132% before NPV becomes negative)

    How?


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    John Moffat
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    We use the normal logic.

    At 8% the project is worthwhile because the NPV is +’ve, and if the cost of capital increases then it will remain worthwhile for a cost of capital up to 18% (when the NPV will be zero).

    So we can afford the cost of capital to increase by 10 percentage points (18 – 8) from an existing 8%.

    In percentage terms this is an increase of 10/8 x 100% = 125%

    (The answer you have written is wrong, or alternatively the question is copied wrong :-) )

    I do go through an example of calculating sensitivities, including that of the cost of capital, in the free lecture.


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    Accountaholic
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    Thank you for your help. I have checked a couple of times and what I have copied is absolutely right and it is exactly how mentioned in the question. :-)

    But it is clear now.
    Thanks :-)


    Profile photo of John Moffat
    John Moffat
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    It must be a typing error in your book :-(

    Anyway, I am pleased that it is now clear.

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