Hi, sir how do we go about doing a question which asks for the SENSITIVITY OF PROJECT LIFE. I've done quite a number of questions of this topic but I have only came across the common project variables like contribution, fixed costs etc.
I don't know how to find the sensitivity of the project life. Should we find the discounted payback period and compare it with the expected project life ?
Ask the Tutor ACCA FM
Sensitivity Analysis
9y ago#1Sensitivity of project life is unusual and if it is asked then it will almost certainly be a project where there are equal flows each year - i.e. an annuity.
Then you could calculate what annuity discount factor would result in a NPV of zero, and then look backwards in the tables to find the relevant number of years.
Okay thank you.
9y ago#3You are welcome :-)
Once we find the relevant number of years where the NPV = 0 , is that the answer ? Or do we have to minus it from the expected life of the project to find the sensitivity ?
9y ago#5No that is not the answer.
Suppose at the moment the expected number of years is 5.
Suppose for a NPV of zero the number of years is calculated as 4.
Then the sensitivity is calculated in the normal way - the % change that can be afforded.
In my example it would be (5-4)/5 = 20%.
Okay , i got it! Thank you
9y ago#7You are welcome :-)
Dear Sir,
After reading your example , your project life Sensitivity is 20%, at this condition how does that % means.
If the project is longer than 20%, this project can be financially acceptable .
9y ago#9No.
It means that the project is acceptable provided its life does not fall by more than 20% (of its expected life).
Sign in to reply to this topic.