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Chapter 26: Q29RQ (page 1464)

How can spreadsheet software, such as Excel, help with sensitivity analysis?

Short Answer

Expert verified

All investing is probabilistic because it is impossible to know with certainty what will occur in 5, 10, or 15 years, but it is possible to provide a realistic range of prospective outcomes, so that investors can change their assumptions in a model and examine the output under various alternative scenarios by using sensitivity analysis in Excel or other spreadsheet program.

Step by step solution

01

Definition

Sensitivity analysis is the examination of several causes of uncertainty in model input might be allocated to the uncertainty in the model's output, whether it is numerical or not.

02

Advantages

Sensitivity analysis provides decision-makers with various outcomes to aid in better commercial decision-making. Predictions are more accurate because they thoroughly analyze the factors that influence them.

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Most popular questions from this chapter

Mountain Manufacturing is considering the following capital investment proposals. Mountain鈥檚 requirement criteria include a maximum payback period of five years and a required rate of return of 12.5%. Determine if each investment is acceptable or should be rejected (ignore qualitative factors). Rank the acceptable investments in order from most desirable to least desirable

Project

A

B

C

D

E

Payback

3.15 years

4.20 years

2.00 years

3.25 years

5.00 years

NPV

\(10,250

\)42,226

(\(10,874)

\)36,251

$0

IRR

13.0%

14.2%

8.5%

14.0%

12.5%

Profitability index

1.54

1.92

0.75

2.86

1.00

You are planning for a very early retirement. You would like to retire at age 40 and have enough money saved to be able to withdraw \(215,000 per year for the next 40 years (based on family history, you think you will live to age 80). You plan to save by making 10 equal annual installments (from age 30 to age 40) into a fairly risky investment fund that you expect will earn 10% per year. You will leave the money in this fund until it is completely depleted when you are 80 years old.

Requirements

1. How much money must you accumulate by retirement to make your plan work? (Hint:Find the present value of the \)215,000 withdrawals.)

2. How does this amount compare to the total amount you will withdraw from the investment during retirement? How can these numbers be so different?

Explain the difference between capital assets, capital investments, and capital budgeting.

Explain the difference between capital assets, capital investments, and capital budgeting.

Question: What is an annuity? How does it differ from a lump sum payment?
See all solutions

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