Sensitivity Analysis

2.

Sensitivity analysis:

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As we can see from the sensitivity analysis, this project is sensitive to sales and inflation. When the store sales is 40 percent below forecast, the NPV becomes negative. In this case, the project will face can cause a big loss. In addition, when the inflation rate jumps to 10%, the NPV increase to 152.52 which is 4 times of the expected NPV (36.57). Although possible construction cost overruns and construction delays can also decrease the NPV, the NPV can still keep positive, which means that this project is still worthy to invest.

Scenario analysis:

What is more, in order to analyze possible future events by considering alternative possible outcomes, we do some risk scenario analysis.

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As we can see from the above table, when all four variables become pessimistic, the project’s NPV is -38.62. It means that this project will face huge risk if all the variables become worse.

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As we can see from the above table, even though only two variables become worse, the NPV is still much lower than the expected case.

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According to the sensitivity analysis, this project is very sensitive to the sales and inflation, therefore, we also consider the case when sales, construction cost and delay in construction become pessimistic and inflation becomes optimistic. As we can see from the result, the NPV is -30.56 which means that this project still faces huge risk.

In conclusion, the potential value of this project is 36.57 if all the variables are in expected case. The risk of this project depends on the share of retail sales. The decrease of retail sales can cause a big loss on the project. Therefore, the manager should pay the most attention to the share of retail sales when valuing the project.