FINANCIAL ANALYSIS

Financial Analysis of Project XYZ

Financial Analysis of Project XYZ

1.1 Sensitivity Analysis of the Project

Sensitivity analysis refers to the impact of changes in the key factors on the overall financial statements and feasibility of the projects. For example, it reflects the changes in the project's cost or NPV due to change in cost of production or any other critical factor. In the case under discussion, the project is highly sensitive to the sales revenue and cost of labour. Minor change in these statistics has affected the net income of the project. For example in the year 2014, the change of GBP 800 has affected the net income by more than 50%. The following graph reflects the trend of weighted average cash flows (GBP) for the next five year.

1.2 Analysis of the Net Present Value

Net present value is the widely used method by the academicians, investors and financial managers to compare and select from a pool of investments. This concept is superior in the existing scheme as it calculates the value of the project in monetary terms (Rohrich, 2007, p. 55). This method works on the basis of the concept of time value of money. It means that one pound sterling after one year is worth less than the same amount of money today. The reason is that the increasing inflation increases the cost of capital; as a result, the purchasing power of the same amount reduces as on today.

The method of net present value is appropriate in the current scenario as it reflects the value of the project in monetary terms. It incorporates the impact of rising inflation and growth rate, at the same time discounts the future cash flows by a certain calculated factor to determine the present value of all the future cash flows (Lumby, 1988, ...