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466 Corporate Finance BRILLIANT’S

forecasts of such variables. If there is any change {dídgZr`Vm na {Z^©a H$aVr h¡Ÿ& `{X BZ do[aE~ëg _| H$moB©
in these variables, the value of NPV and IRR M|O hmoVm h¡ Vmo NPV Ed§ IRR _| ^r M|O hmoJmŸ& gmW hr,
will also change. Again, the change in NPV and
NPV Ed§ IRR _| hmoZo dmbm M|O, do[aE~ëg _| hmoZo dmbo M|O
IRR need not be in the same proportion as
change in variables because some variables Ho$ AZwnmV _| hr hmoZm Amdí`H$ Zht h¡ Š`m|{H$ Hw$N> do[aE~ëg
may be more sensitive to the cash flows than Xygao do[aE~ëg H$s VwbZm _| H¡$e âbmo Ho$ à{V, A{YH$
other. gopÝg{Q>d hmo gH$Vo h¢Ÿ&
Sensitivity analysis is an important gopÝg{Q>{dQ>r EZm{b{gg EH$ _hËdnyU© Q>opŠZH$ h¡ Omo
technique which helps the financial manager \$m`ZopÝe`b _¡ZoOa H$mo `h OmZZo _| ghm`Vm H$aVr h¡ `{X
to know what will happen to the outcome of Hw$N> do[aE~ëg O¡go goëg `m H$m°ñQ> H$s Ano{jV d¡ë`yO _|
the project when some variables like sales or H$moB© {dMbZ (deviation) hmoVm h¡ Vmo àmoOoŠQ> Ho$ n[aUm_m|
costs deviates from its expected value. In this na Š`m à^md n‹S>oJmŸ& Bg àH$ma `h EH$ "Š`m hmoJm- `{X
way, it is a ‘what-if’ analysis. It analyses the (what-if)' {díbofU h¡Ÿ& `h {H$gr EH$ do[aE~b _| hmoZo
possible changes in project’s NPV or IRR for a dmbo n[adV©Z H$m àmoOoŠQ> H$s NPV `m IRR na n‹S>Zo dmbo
given change in one of the variables. If the NPV g§^m{dV à^mdm| H$m {díbofU H$aVm h¡Ÿ& `{X NPV Ed§ IRR
and IRR are more sensitive to changes, the n[adV©Zm| Ho$ à{V A{YH$ gopÝg{Q>d h¢ Vmo do[aE~ëg H$mo Ü`mZ
variables would become more critical. _| aIZm ~hþV Amdí`H$ hmo OmEJmŸ&
Steps involved in the use of sensitivity gopÝg{Q>{dQ>r EZm{b{gg H$m Cn`moJ H$aZo hoVw Amdí`H$
analysis
ñQ>oßg
Following are some important steps in- gopÝg{Q>{dQ>r EZm{b{gg H$m Cn`moJ H$aZo hoVw Hw$N>
volved in the use of sensitivity analysis: Amdí`H$ ñQ>oßg {ZåZ{b{IV h¢…
1. Identification of all those variables, which 1. CZ d¡[aE~ëg H$mo V` H$aZm Omo àmoOoŠQ> H$s NPV
have an influence on the NPV or IRR of the `m IRR H$mo à^m{dV H$aVo h¢Ÿ&
project.
2. Establish underlying mathematical 2. BZ do[aE~ëg Ho$ ~rM H$s _¡W_o{Q>H$b [aboeZ{en
relationship between these variables. H$mo {ZYm©[aV H$aZmŸ&
3. Analysis of the impact of the changes in 3. àË`oH$ do[aE~b _| hmoZo dmbo M|O H$m àmoOoŠQ> H$s
each of the variables on the project’s NPV NPV `m IRR na n‹S>Zo dmbo à^md H$m {díbofU
or IRR.
H$aZmŸ&
When the decision-maker performs O~ {ZU©`H$Vm© gopÝg{Q>{dQ>r EZm{b{gg H$s ghm`Vm
sensitvity analysis, he computes the different boVm h¡ Vmo dh {d{^Þ H¡$e âbmoO H$m AZw_mZ {ZåZ{b{IV
cash flow estimates under three assumptions:
VrZ _mÝ`VmAm| Ho$ AmYma na H$aVm h¡…
(i) Pessimistic or the worst (i) {ZamemdmXr `m g~go ~war pñW{V
(ii) Expected or the most likely, and (ii) Ano{jV `m {OgH$s g§^mdZm g~go A{YH$ h¡ Ed§
(iii) Optimistic or the best. (iii) AmemdmXr `m g~go AÀN>r pñW{VŸ&
It allows him to ask ‘what-if’ questions. BgH$s ghm`Vm go dh "Š`m hmoJm- `{X (what-if)'
For example: àíZm| na {dMma H$a gH$Vm h¡, CXmhaU Ho$ {bE…