Sensitivity Analysis In Risk Management
In light of the two project’s analysis, the evaluation criteria that make the basis of evaluation through input of values that serve to calculate the expected outcomes. However, due to the effect that different factors have, it is possible that the input values may not produce results that can be realized in future making the evaluation incorrect. Therefore, managing possible risks requires an analysis of possible changes through the sensitivity analysis.
In that respect, the sensitivity analysis for the two projects that involves adjusting all the variables by +10% and -10% produces NPV and IRR results as shown on the table below. (Weil, Schipper & Francis, 2012)
Yorkshire wind-farm company sensitivity …show more content…
- Inflation affects projects finance needs as well as the cost of capital and the company’s gearing. (Kent, 2010)
Thus, since the project’s fixed assets increases in money value, they must be financed through capital increase. In addition, if future inflation can be predicted with accuracy, the company can determine the amount of extra capital that is needed and act accordingly by either borrowing the excess or increasing earnings retention. (Schoenebeck & Holtzam, 2012)
However, in the event that the inflation rates cannot be estimated with accuracy, the company could estimate what it could be and make plans to obtain the extra financing through provisions like contingency funds if inflation exceeds the expected rate.
There has been different ways of accounting for inflation including the current cost accounting (CCA) and current purchasing power (CPP).
- CPP involves making adjustments to capital and revenue values to allow for the general inflation rate.
- CCA involves taking into account the specific inflation by adjusting the values of assets. (Collins & Bruce,