From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV

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Spreadsheet analysis: Sensitivity to changes in estimates

Spreadsheet analysis: Sensitivity to changes in estimates

From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV

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Spreadsheet analysis: Sensitivity to changes in estimates

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- We have computed the NPV of the Lilly Company Machine to be positive $13,658. Now we want to examine the impact on that MPV of changes in the assumptions behind our analysis. We will focus on MPV, remembering that if NPV is negative than IRR is going to be less than the hurdle rate. Here's a summary of our NPV analysis. Remember the interest rate is 10%, the number of years is five, the income tax rate is 40%. We've got our cash inflows and outflows and the net present value as $13,658. If we had these numbers in a spreadsheet we could easily explore the impact of changes in the assumptions. For example, what if we have some uncertainty about the amount of the annual after-tax net cash revenues. We are confident that the amount will be somewhere between 20,000 and 28,000. Well, we could work through the calculations and this is easy using a spreadsheet. To discover that if the actual annual cash inflow is 20,000…

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