Description of Sensitivity analysis
Division leaders in JMI's airplane manufacturing plants have asked for your analysis for replacing old manufacturing equipment for standard planes with faster, more costly new equipment next year. This year, though JMI's innovative S2S-900 has experienced moderate initial success, the total aircraft sales have not been as great as in the past, and cash flow has been uneven in this area.
You have been asked to use sensitivity analysis in planning capital budgeting.
Division leaders want to know what would happen to expected cash flows under different discount rates. Others want to know how net present value of the project will vary according to cash flows different from those forecasted.
Explain exactly how a spreadsheet may be set up to build a net present value model for the equipment decision. What components would be included in the spreadsheet? How could you perform sensitivity analysis on the spread sheet?