Catalog

	Table of Contents
p. 159 of 203 BACK | NEXT Foreword 1. Introduction to the Guidelines 2. User Instructions 3. Preparing and Appraising Investment Project 4. Financial Management of Executing Agencies 5. Reporting and Auditing 6. Financial Institutions 7. Knowledge Management 7.1. Useful Websites 7.2. Operations Manual (OM) 7.3. Project Administration Instructions (PAIs) 7.4. International Standards 7.5. International Accounting and Auditing Architecture 7.6. Financial Review Checklist for RRPs 7.7. Appraisal Checklist: Nonrevenue-Earning Project 7.8. Appraisal Checklist: Revenue-Earning Project 7.9. Appraisal Checklist: Private Sector Project 7.10. Appraisal Checklist: Financial Institution 7.11. Undertaking Sensitivity and Risk Analyses 7.11.1. Step 1: Identify the Key Variables 7.11.2. Steps 2 and 3: Calculate Effects of Changing Variables 7.11.3. Step 4: Analyze Key Variable Changes 7.11.4. Undertaking Risk Analysis 7.12. Model Operating Covenants 7.13. Model Capital Structure Covenants 7.14. Model Liquidity Covenants 7.15. Commonly Used Ratios 7.16. Model Financial Statements: Service Organization 7.17. Model Financial Statements: Manufacturing Organization 7.18. Model Terms of Reference for an Auditor 7.19. Audit Report Questionnaire Addendum

Financial Management and Analysis of Projects : 7. Knowledge Management : 7.11. Undertaking Sensitivity and Risk Analyses

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7.11.3. Step 4: Analyze Key Variable Changes

7.11.3.1. In the case of an increase in investment costs of 20%, the sensitivity indicator is 13.34. This means that the change of 20% in the variable (investment cost) results in a change of (13.3 x 20%) = 266% in the FNPV. It follows that the higher the SI, the more sensitive the FNPV is to the change in the concerned variable.

7.11.3.2. In the same example, the switching value is 7.5%, which is the reciprocal value of the SI x 100. This means that a change (increase) of 7.5% in the key variable (investment cost) will cause the FNPV to become zero. The lower the SV, the more sensitive the NPV is to the change in the variable concerned and the higher the risk with the project.

7.11.3.3. At this point the results of the sensitivity analysis should be reviewed. It should be asked: (i) which are the variables with high sensitivity indicators, and (ii) how likely are the (adverse) changes (as indicated by the switching value) in the values of the variables that would alter the project decision?

Back 7.11.2. Steps 2 and 3: Calculate Effects of Changing Variables	Next 7.11.4. Undertaking Risk Analysis