Session 1: Building a Financial Analysis Model for ICT

Session Learning Outcome
The purpose of this session is to show how the different variables studied in this course and other courses can affect the analysis of a project. In actual undertakings of projects, there are micro and micro variables which affect overall project analysis.

Introduction

Sensitivity Analysis (SA) is the study of how the variation in the output of a model (numerical or otherwise) can be apportioned, qualitatively or quantitatively, to different sources of variation.

Sensitivity Analysis (SA) aims to ascertain how the model depends upon the information fed into it, upon its structure and upon the framing assumptions made to build it. This information can be invaluable, as:

• Different level of acceptance (by the decision-makers and stakeholders) may be attached to different types of uncertainty.
• Different uncertainties impact differently on the reliability, the robustness and the efficiency of the model.
  Sensitivity analysis is also referred to as “what if analysis”

Building Financial Analysis Model
Several activities can be considered in building financial analysis model. In the building of the financial model the following have to be considered:

1. Conservative estimations of the revenues/benefits
   This is helpful to ensure that the viability of the proposed project is not easily threatened by unfavorable circumstances. The capital budgeting should be done in a such a way that it has a build in system for conservative estimations. The revenue figures should be justifiable given the capital expenditure proposals.
2. Safety Margin Cost figures
   A margin of safety for the cost items should be estimated. He margin can be between 10% -30%. For instance, in estimation of installation costs of a wireless telephone system, 10%-30% of the normal installation costs can be added. The management can decide on the percentages in the cost estimation of various items depending on the experience and other firm considerations.
3. Flexible Investment yardsticks
   Cutting point for the investments can be changed considerably to allow more room for seeing beyond the normal cut-off points. Example if the policy of a company is to accept the projects with payback period of less than three years, the use of a prolonged period can be assessed to determine the impact thereto.
4. Calculating the Overall risk index
   Some projects may call for the calculation of the overall risk index for various project components. These cutoff points may be based on sales, prices, operating cots, etc.
   
   

The company may vary all the items by 62% favorable, given the risks index consideration.

5. Judgment on Three point estimation
   Telecommunication companies may judge their operations on three point estimation based on the hours of access as follows:
   • Business (peak) hours
     E.g. From 0800hrs – 1800hrs
   • Evening/Morning (off-peak) hours
     E.g. from 0600hrs – 0800 hrs and from 1800hrs – 2200hrs.
   • Night Hours
     E.g 2200hrs-0600hrs

   Various interconnection and charging rates are considered between three different times as indicated above. Reasons may be due to the fact that the use of bandwidth (which is paid even if not consumed) varies from the three time zones indicated above.

Other considerations may be backed on the market responses and returns. The returns for this case may be classified as:

• Most pessimistic
• Most likely