Tasty Foods Corporation

c. One primary weakness of sensitivity analysis is that it does not deal with the probability distribution of the inputs. This type of analysis lacks the information stating how likely it is that a particular situation will occur. Another problem with sensitivity analysis is that it only manipulates one variable at a time and ignores relationships between variables. In an analysis of a project it would be very useful to be able to adjust multiple variables at a time to see combined effects of changes. A final weakness of sensitivity analysis is that is does not reflect diversification. A primary advantage of sensitivity analysis is that it helps to show which variables have the greatest effect on the project and can identify dangerous variables. It can also help with a breakeven analysis for NPV. Another advantage to sensitivity analysis is that it helps give an idea of the stand alone risk for a project because it does not say anything about other projects.

3. The base case NPV is $178,337 and the best-case IRR is 41.7%. We were able to calculate the project’s expected NPV by multiplying each scenario’s probability by its NPV and then calculating the sum of those numbers. For example, for the worst case scenario we multiplied 25% by -$258,628. We used the same equation for the base and best scenarios and calculated an expected NPV of $173,570.50. To calculate the project’s standard deviation we used the equation (NPVi-NPVmean)^2*Pi. NPVi equals the scenario’s NPV, NPVmean equals the average of all the weighted NPV’s, and Pi is the probability of the scenario. We used this equation for each of the scenarios, calculated the sum, took the square root of the sum and calculated $302,277.65 as the standard deviation. The coefficient of variation was calculated by dividing the average NPV by the standard deviation and our result was 1.74.

4. One important advantage of scenario analysis is that it accounts for all the things that sensitivity analysis...