• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Ask AI
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for September 2025 exams.
Get your discount code >>

June 2009 question Q1 part a – sensitivity analysis

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › June 2009 question Q1 part a – sensitivity analysis

  • This topic has 7 replies, 4 voices, and was last updated 8 years ago by John Moffat.
Viewing 8 posts - 1 through 8 (of 8 total)
  • Author
    Posts
  • May 22, 2011 at 5:47 pm #48537
    Anonymous
    Inactive
    • Topics: 12
    • Replies: 19
    • ☆

    Hi John:

    The requirement for June 2009 question 1 asks for a sensitivity analysis of 1m change in initial investment. The solution is absolutely bizzare. I have no idea how they have arrived to those answers. Could you briefly explain how it is done?

    Thanks!

    SK

    May 26, 2011 at 5:48 pm #82040
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    The point is that if they spend an extra 1m on the investment, then all the cash flows (apart obviously the extra 1m) would stay exactly as before, except that the capital allowances would greater (and therefore the tax saving on the capital allowances).
    What you need to do is calculate the additional capital allowances there would be each year on another 1M, then calculate the extra tax saving there would be on the extra allowances, and then the present value of the tax savings. That PV, less the 1M extra investment at time 0, will be the change there will be in the exisiting NPV.

    Hope that helps.

    November 13, 2012 at 10:18 am #82042
    dazhong0703
    Member
    • Topics: 44
    • Replies: 130
    • ☆☆

    What are the different functionalities between sensitivity and simulation analysis in improving the accuracy of NPV? Thank you.

    November 13, 2012 at 7:19 pm #82043
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    What do you mean by functionalities?

    Neither sensitivity nor simulation improve the accuracy.

    Sensitivity gives an indication as to how important the various estimates are. If one has a low sensitivity then only a small error in the estimate would mean we have made the wrong decision. Therefore we would do a lot more work trying to get as accurate an estimate as possible, or maybe decide not to take the risk of doing the project.

    Simulation looks at all possible NPV’s that could result, and then we are able to estimate the probability of the NPV ending up positive, and therefore the probability of our decision to accept (or reject) being the correct decision.

    November 28, 2012 at 2:05 pm #82044
    dazhong0703
    Member
    • Topics: 44
    • Replies: 130
    • ☆☆

    What I mean is when I check past paper suggested ans for testing sensitivity or simulation, they always put in ‘other factors’ as one point. I just want to reproduce, but firstly I must understand what sensitivity or simulation analysis can improve. Especially for simulation, what probability, distribution, random variables, etc. very hard to understand. Could you elaborate some more within one or two paragraghs, pls? Thank you.

    E.g.
    Other factors
    (i) Sandro Hotel inc should consider the accuracy of the cash flow projections, sales, costs, tax rate the realisable value of the asset. Sensitivity analysis or simulation analysis might be used to investigate the effect of changes in key cash flows.
    (ii) The discount rate used was calculated on the assumption that Angus business risk will be the same as the business risk that Sandro will face in the theme park sector. This might not necessary be true.
    (iii) No consideration is taken of the cash flows beyond the company’s four year planning horizon.
    ……

    November 28, 2012 at 7:02 pm #82045
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Sensitivity is a measure of the change that can be ‘afforded’ before we would reject the project. So, for example, if the sensitivity of a certain factor was 50% it would mean it would have to change by 50% before we would reject the project – I would not be too worried because although my estimate might be wrong it would be unlikely to be so much wrong! However, if the sensitivity was 5% then I would be a lot more worried because it would mean that if my estimate was only 5% wrong then we should be rejecting the project.

    Simulation looks at all the possible results that there could be. Maybe we have estimated sales volume as 10,000 units per year, but it could be 5,000 or it could be 15,000. In addition we might have estimated that the selling price will be $10 per unit, but it might be $11 and it might be $9.

    If we can list all the possible things that can happen and if we know the probabilities of them happening, then we could set up a spreadsheet and list every possible result and calculate the probabilities of those results. We could therefore calculate the probability of getting a positive NPV.

    February 10, 2017 at 2:16 pm #371858
    natashadaud
    Member
    • Topics: 0
    • Replies: 3
    • ☆

    hi sir, can you explain why in year 6 we can claim both capital allowances and balancing allowance? Is it in a year we can claim either one? furthermore, it is dispose in year 6, so there shouldn’t be capital allowance claimed in that year. i’m confused.

    February 10, 2017 at 7:12 pm #371897
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    It was a funny thing to do, but try not calculating a writing down allowance and just calculating a balancing allowance. You will find that the total is exactly the same!!!

    (I assume you did attempt it before looking at the answer 🙂 )

  • Author
    Posts
Viewing 8 posts - 1 through 8 (of 8 total)
  • The topic ‘June 2009 question Q1 part a – sensitivity analysis’ is closed to new replies.

Primary Sidebar

Donate
If you have benefited from our materials, please donate

ACCA News:

ACCA My Exam Performance for non-variant

Applied Skills exams is available NOW

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

ACCA CBE 2025 Exams

How was your exam, and what was the exam result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Donate

If you have benefited from OpenTuition please donate.

PQ Magazine

Latest Comments

  • o1lim on Discounted Cash Flow Further Aspects, Replacement – ACCA Financial Management (FM)
  • julio99 on Impairments – Impairment (CGU) – ACCA Financial Reporting (FR)
  • effy.sithole@gmail.com on EPS – diluted EPS Example – ACCA Financial Reporting (FR)
  • Ken Garrett on The Finance Function in the Digital Age – CIMA E1
  • DeborahProspect on ACCA SBR Specimen Exam 2 Question 1

Copyright © 2025 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in