Fundamentals of Financial Management (Concise 6th Edition)

Figure 12-1, the slopes of the lines in the graph indicate how sensitive NPV is
to each input: The larger the range, the steeper the variable’s slope and the more sensi-
tive the NPV is to this variable. We see that NPV is very sensitive to changes in
the sales price, fairly sensitive to changes in variable costs, a bit less sensitive
to units sold and " xed costs, but not very sensitive to changes in the equipment
cost or the WACC.
If we were comparing two projects, the one with the steeper sensitivity lines
would be riskier, other things held constant, because relatively small changes in

Sensitivity Graph for Project S

F I G U R E 1 2# 1

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A B C D E F G H I

-25% 0% 25%

$2,500

NPV

-$2,500

-$1,500

-$500

$500

$1,500

Price

VC

Equipment

Fixed Costs

WACC

Units

Percentage Deviation from Base

1. When all of the inputs are set at their base-case levels, their deviations from base are all zero and the NPV is $78.82.
   So the vertical axis intercept is at $78.82.


2. If the sales price is set 25% above its expected $10 price and all other variables are set at their expected values, the
   NPV would be +$2,526.86. If the price is set 25% below its expected $10 price, the NPV would be -$2,369.22. All the
   other NPVs shown in the table were found similarly. Excel data tables were used to streamline the calculations.


3. Note that the best and worst case NPVs are di#erent from those in the next section, for scenario analysis. In scenario
   analysis, all the variables are 25% above or below their expected levels; so the best and worst case NPVs are much higher
   or lower than those in the sensitivity analysis, where only one variable is set at its best or worst level.

Deviation

from Base

Range

NPV with Variables at Di#erent Deviations from Base

Sales Price VC/Unit

$2,526.86

78.82

-2,369.22

$4,896.07

-$1,245.67

78.82

1,403.31

$2,648.97

Fixed Costs

-$872.14

78.82

1,029.78

$1,901.92

Units Sold

$1,202.37

78.82

-1,044.73

$2,247.10

WACC

$33.62

78.82

127.62

$93.99

Equipment

-$71.26

78.82

228.90

$300.17

25%

0%

-25%

Chapter 12 Cash Flow Estimation and Risk Analysis 377