This process refers to measuring profitability under different scenarios like increasing costs, decreasing sales, or increasing the discount rate. Like the viability test shown in the previous section, measuring viability under risk conditions will run measurements like the (PV), (NPV), (IRR), and (PBP), but with different variable conditions from the base-case conditions. The significance of this process reveals viability measurement under different risk scenarios and ranges the level of profitability fluctuating due to various variable causes.
Step-By-Step Process
- Clarify the study’s details on the income statement, balance sheet, cash flow statements, and base-case viability results.
- Decide on the variable conditions from the base case, like increasing the costs by 10%, decreasing the sales by 10%, increasing the discount rate, reducing the growth rate, and so forth.
- Run the viability testing for each variable condition case and compare results with the base-case results.
- Obtain industry benchmarks and performance indicators, especially regarding the viability indicators like (PV), (NPV), (IRR), (PBP), and (ROI), to validate your investment viability.
- Draft the viability results for discussion with your team and experts.
- Evaluate and test the outcomes of the viability results.
Example
Here is the sensitivity analysis for a pharmaceutical manufacturing facility:
| Scenarios | PV ($ Mil.) | NPV ($ Mil.) | Payback Period | IRR Investment (%) | IRR Equity (%) | Breakeven point- Sales ($ Mil.) |
| Decreasing in revenues: 10%- Quantity | 168 | 140 | 9 years & 1 months | 27 | 34 | – |
| Decreasing in revenues: 10%- Price | 145 | 117 | 9 year & 9 months | 25 | 30 | |
| Increasing discount rate to 12% | 89 | 60 | 7 years & 4 months | 27 | 32 | – |
| Increasing operating costs by 10% | 160 | 131 | 9 years & 6 months | 26 | 31 | – |
| Decreasing growth rate to be 2% (after 10-year operation) | 144 | 172 | 7 years & 11 months | 30 | 38 | – |
| Base situation | 243 | 215 | 7 years & 11 month | 32 | 41 | $26.7 mil. @ 87% of 4th year sales |
Useful Tips
- Set reasonable variable scenarios.
- Compare variability results with the base case results.
- Share discussions and results with your team and experts.
Things To Avoid
- Avoid guessing works and assumptions without evidence.
Final Note
This article is sourced from my new book- Your Guide For Preparing An Industrial Feasibility Study.
For more information about the book: https://growenterprise.co.uk/book-your-guide-for-preparing-an-industrial-feasibility-study/
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The author: Munther Al Dawood- Industrial Enterprise Expert
Grow Enterprise 