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Important query

Abhinandan (student) (407 Points)

28 December 2010

can some1 tell in a manner of layman what is the meaning of sensitivity analsyis

accounting rate of return

internal rate of return

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Accounting rate of return or Average rate of return is the ratio between average earnings after tax p.a and average investment. ARR provides a quick estimate of a project's worth over its useful life. (check solved examples and formulas of your book to clear your concept) Internal rate of return (IRR) is the rate of return which equates the total present value of cash inflows with the total present value of cash outflows. In other words, IRR is the rate which makes NPV zero. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first. Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be different compared to the key prediction.

Rineesh Raghavan (MD) (108 Points)
Replied 28 December 2010

Hi Anchal

It would be helpful if you could let us know if you are from IPCC or CA Final. Secondly, also please tell us whehter if you are aware of time value of money area in Financial Management. That would help me in explaining as simply as is possible. Since the above areas relate to Financial Management, these information are pretty much required.

All the best.

Rineesh R

Abhinandan (student) (407 Points)
Replied 29 December 2010

Rineesh Sir

I m ipcc student and I know a bit about time value of money pls explain me it will be of great help....waiting for ur reply....

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 29 December 2010

Sensitivity Analysis is called What if Aanlaysis which u can use spread sheet .If there is a change in one varaible what is the impact on profitSay if sales increases by 10% other things remaining constant what would be the profit ARR and IRR you can Find in detail on capital Budgeting ARR=PAT/Average Capital Employed IRR is the rate of return expected over and above the cost of capital employed .You can see the Intrapolation formula in the book and in detail Sensitivity anlaysis you can have a look in Marginal Costing and in CA Final in the chapter Risk Analysis in Capital Budgeting ARR and IRR are techniques used in capital Budgeting for evaluating the worth of the Project