1. It compels the decision maker to identify the variables which affect the cash flow forecasts.
This helps him in understanding the investment project in totality.
2. It indicates the critical variables for which additional information may be obtained. The decision maker can consider actions which may help in strengthening the "weak spots" in the project.
3. It helps to expose inappropriate forecasts and thus guides the decision maker to concentrate on relevant variables.
Kavungya answered the question on April 13, 2021 at 09:29
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Outline the steps followed in use of sensitivity analysis.
(Solved)
Outline the steps followed in use of sensitivity analysis.
Date posted:
April 13, 2021
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Answers (1)
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What is sensitivity analysis?
(Solved)
What is sensitivity analysis?
Date posted:
April 13, 2021
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Answers (1)
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State the demerits of certainty equivalent approach.
(Solved)
State the demerits of certainty equivalent approach.
Date posted:
April 13, 2021
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Answers (1)
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State the merits of certainty equivalent approach.
(Solved)
State the merits of certainty equivalent approach.
Date posted:
April 13, 2021
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Answers (1)
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Assume a project costs Sh 30,000 and yields the following uncertain cashflows:
Compute the NPV of the project
(Solved)
Assume a project costs Sh 30,000 and yields the following uncertain cash flows:
Year Cash flow
1 12,000
2 14,000
3 10,000
4 6,000
Assume also that the certainty equivalent coefficients have been estimated as follows:
α0 = 1.00
α1 = 0.90
α2 = 0.70
α3 = 0.50
α4 = 0.30
The risk-free discount rate is given as 10%
Required
Compute the NPV of the project
Date posted:
April 13, 2021
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Answers (1)
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Outline the methods that can be used to incorporate risk into capital budgeting decisions.
(Solved)
Outline the methods that can be used to incorporate risk into capital budgeting decisions.
Date posted:
April 13, 2021
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Answers (1)
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Study the table below and compute the expected cash flow.
(Solved)
Study the table below and compute the expected cash flow.
Date posted:
April 13, 2021
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Answers (1)
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Outline the possible attitudes towards Risk.
(Solved)
Outline the possible attitudes towards Risk.
Date posted:
April 13, 2021
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Answers (1)
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Define the term risk associated with a project.
(Solved)
Define the term risk associated with a project.
Date posted:
April 13, 2021
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Answers (1)
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Project A has the following cashflows over its useful life of 3 years. The market value (Abandonment
value) has also been given.
(Solved)
Project A has the following cashflows over its useful life of 3 years. The market value (Abandonment value) has also been given.
Year Cash Abandonment
flow value
Sh`000' Sh`000'
0 (4,800) 4,800
1 2,000 3,000
2 1,875 1,900
3 1,750 0
Required:
Determine when to abandon the project assuming a discount rate of 10%.
Date posted:
April 13, 2021
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Answers (1)
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Management is faced with eight projects to invest in. The capital expenditures during the year has been rationed to Sh 500,000 and the projects have...
(Solved)
Management is faced with eight projects to invest in. The capital expenditures during the year has been rationed to Sh 500,000 and the projects have equal risk and therefore should be discounted at the firm's cost of capital of 10%.
Required:
Determine the optimal investment sets.
Date posted:
April 13, 2021
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Answers (1)
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A company is considering two mutually exclusive projects requiring an initial cash outlay of Sh 10,000 each and with a useful life of 5 years....
(Solved)
A company is considering two mutually exclusive projects requiring an initial cash outlay of Sh 10,000 each and with a useful life of 5 years. The company required rate of return is 10% and the appropriate corporate tax rate is 50%. The projects will be depreciated on a straight line basis. The before depreciation and taxes cash flows expected to be generated by the projects are as follows.
Required:
Calculate for each project
i. The payback period
ii. The average rate of return
iii. The net present value
iv. Profitability index
v. The internal rate of return
Which project should be accepted? Why?
Date posted:
April 13, 2021
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Answers (1)
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State and explain the two groups of investment appraisal techniques.
(Solved)
State and explain the two groups of investment appraisal techniques.
Date posted:
April 13, 2021
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Answers (1)
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What are capital budgeting decisions?
(Solved)
What are capital budgeting decisions?
Date posted:
April 13, 2021
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Answers (1)
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Two neighbouring countries have chosen to organize their electricity supply industries in different ways. In
country A, electricity supplies are provided by a nationalized industry. On...
(Solved)
Two neighbouring countries have chosen to organize their electricity supply industries in different ways. In
country A, electricity supplies are provided by a nationalized industry. On the other hand in country B
electricity supplies are provided by a number of private sector companies.
Required:
(a) Explain how the objectives of the nationalized industry in country A might differ from those of the private sector companies in country B.
(b) Briefly discuss whether investment planning and appraisal techniques are likely to differ in the nationalized industry and private sector companies.
Date posted:
April 13, 2021
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Answers (1)
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Explain the forms of informational efficiency.
(Solved)
Explain the forms of informational efficiency.
Date posted:
April 13, 2021
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Answers (1)
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State and explain three types of efficient market hypothesis.
(Solved)
State and explain three types of efficient market hypothesis.
Date posted:
April 13, 2021
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Answers (1)
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In which ways is corporate governance important?
(Solved)
In which ways is corporate governance important?
Date posted:
April 13, 2021
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Answers (1)
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Define the term corporate governance.
(Solved)
Define the term corporate governance.
Date posted:
April 13, 2021
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Answers (1)
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Briefly describe the required rate of return (Ri).
(Solved)
Briefly describe the required rate of return (Ri).
Date posted:
April 13, 2021
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Answers (1)