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Capital Budgeting Under Risk Sensitivity Analysis: Presented By: Name Roll#

This document discusses capital budgeting and risk sensitivity analysis. It presents 3 problems analyzing NPV and risk of projects. Problem 1 calculates NPV and sensitivity of a project's NPV to changes in machine cost, running cost, and savings. It finds NPV is most sensitive to changes in savings. Problem 2 compares 2 projects' risk, defined as standard deviation, finding Project B riskier. Problem 3 estimates the NPV of 2 projects as $9000 each, finds Project Y riskier based on higher standard deviation, and recommends Project X due to lower risk.

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shanawazchauhan
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225 views

Capital Budgeting Under Risk Sensitivity Analysis: Presented By: Name Roll#

This document discusses capital budgeting and risk sensitivity analysis. It presents 3 problems analyzing NPV and risk of projects. Problem 1 calculates NPV and sensitivity of a project's NPV to changes in machine cost, running cost, and savings. It finds NPV is most sensitive to changes in savings. Problem 2 compares 2 projects' risk, defined as standard deviation, finding Project B riskier. Problem 3 estimates the NPV of 2 projects as $9000 each, finds Project Y riskier based on higher standard deviation, and recommends Project X due to lower risk.

Uploaded by

shanawazchauhan
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Capital budgeting under risk sensitivity analysis

PRESENTED BY:
NAME ROLL#
INDER CHANDNANI 08
SHANAWAZ CHAUHAN 09
JITEN PATEL 25
GOPAL PRADHAN 28
CHIRAG SHAH 31
AMIT KAMAT 00
Problem:1
Cost m/c Running Cost Saving

0 7000

1 2000 6000

2 2500 7000

Cost of capital is 8%

Calculate
a)NPV
b) Calculate sensitivity analysis w.r.t
Cost of m/c
Running cost
Saving
Cost m/c Running Cost Saving

0 7000

1 2000*0.93 6000*0.93

2 2500*0.86 7000*0.86

7000 4010 11600

NPV=sum of all inflows-sum of all out flows


= 11600-11010(7000+4010)
NPV = 590
NPV=F(cost of m/c , running cost , Saving
1)Sensitivity analysis w.r.t to m/c cost

Sensitivity(w.r.t to cost of m/c)= (590/7000)*100=8.42%

2)Sensitivity analysis w.r.t to running cost


Sensitivity(w.r.t to running cost)= (590/4010)*100=14.71%

3) Sensitivity analysis w.r.t to running cost


Sensitivity(w.r.t to running cost)= (590/11600)*100=5.09%

Conclusion:
For firm it will be better to operate by varying saving and m/c cost
Rather than varying running cost because from because that vary NPV more.
Problem:2

Project A Project B

Probability NPV Probability NPV


0.2 1000 0.2 1200
0.6 800 0.6 800
0.2 600 400 0.2

Which project is more risky?


For both project we will calculate standard deviation

For Project A:
Mean(A)=(1000*0.2+0.6*800+0.2*600)=800

Deviation from mean:


Mean-x1=800-1000=-200 squaring we will get 40000*0.2=8000
Mean-x2=800-800=0 squaring we will get 0*0.6 =
Mean-x3=800-600=200 squaring we will get 40000*0.2=8000

Adding deviation we will get variance =16000

Standard deviation(A)= Sqrt (variance)= Sqrt (16000)=126.49

If we will work out on similar line we will get


Standard deviation(B) = 252.98
Conclusion:
Standard deviation for project B is
much higher than that of project A hence project
B is more risky.
Problem:3

Project X Project Y

Probability NPV Probability NPV


0.1 3000 0.2 3000
0.4 6000 0.3 6000
0.4 12000 0.3 12000
0.1 15000 0.2 15000

1)Calculate the estimated of NPV of project X and project Y?


2) Which project is more risky?
3)Which project you will be going for?
For Project X:
Mean(X)=(0.1*3000+0.4*6000+0.4*12000+0.1*15000)=9000

Estimated value for project X = 9000

Standard deviation(X)=3794.73

For Project Y:
Mean(Y)=(0.2*3000+0.3*6000+0.3*12000+0.2*15000)=9000

Estimated value for project Y = 9000

Standard deviation(Y)= 4449.71


Conclusion:
Standard deviation for project B is
much higher than that of project X hence project
Y is more risky.

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