Session 2: Sensitivity Analysis Using Micro and Macro Economic Variables

This section explains some of the micro economic variables which can be varied in accounting analysis issues, cost of capital and project management that affects the outcomes of the project, and which can have varying effects in the project.

Learning Outcome
After completing this session the learner should be able to build and analyse a financial model

A: Micro variables Consideration
Accounting micro-economic analysis:

• Sales (Price, quantity sold, market share)
• Operating expenses (various expenses items)
• Profit margin

Cost of Capital variables

• Capital structure/gearing/leverage
• Costs of debt, equity, WACC and the CAP model which affects
• Changing of the forms of finance e.g. leasing, the use of warranties, etc.

Project management Issues

• Changing the cutoff point of the project returns
• Changing of the method of analyzing the projects
• Changing the project duration

The sensitivity analysis will bring changes in various items in the analysis of financial statements or the projects which in turn might lead to different conclusions regarding the implementation of projects.

Issues considered in session 1 can be applies to the variables under consideration.

A detailed example is as presented in the Ms Excel case study.

B: Macro variables Consideration
Macro economic variables are the variable that affects the operation of the industry of which the firm operates. They can not be changed by the firm’s management.

Macro economic variables which affect projects include among others:

• Changes in the accounting standards e.g. methods of calculating depreciation
• Changes in the tax rates in the ICT equipment and the profit generated by the companies
• Changes in the interconnection charges
• Imposition of regulation regarding operation of the telecommunications
• Changes in the GDP and GNP
• Extension of various government subsidized projects e.g. rural electrification
• General employment trends e.g. if the government changes the salary scales
• Changes in the market share due to the new entrants in the market.
• Imposition of regulations on environmental and safety issues in the industry
• Changes in the government regulations on the issues of privatization and foreign direct investment

The above factors can be quantified

MODULE LEARNING ACTIVITIES

INDIVIDUAL LEARNING ACTIVITY
Search in the in the internet a case study in Project Management which shows different selection methods. Review and Comment on the case study. Prepare a summary of not more than five(5) pages to be presented on the discussion board.

GROUP LEARNING ACTIVITY – BUILDING A FINANCIAL MODEL

This activity should be done by a group of two learners/students. If the learner cannot link up with a partner she/he should inform the course coordinator.

1. The learner is required to follow a financial model developed in Microsoft Excel. Follow all the steps in order for you to be able to develop your own model.

2. Based on the projects you know try to carry a sensitivity analysis by varying:

• One variable at a time (Micro)
• More than two variables at a time (Micro)
• Macro variables at a time keeping micro variables constant
• More than three micro and macro variables simultaneously.
  

PREPARATION FOR THE SECOND TEST
Your have now completed the whole course. Before you do the final exam you will do a one test which will cover chapters 12 to 17.Like in the first exam you are required to required to go through all the review questions and exercises presented in the chapters.

PREPARATION FOR THE FINAL EXAMINATION
Your have now completed the whole course, and should be ready for the final examination. To prepare yourself for the exam go through all the questions studied in this course. You should also try other questions in the reference books/materials. In case there issues which are not clear you should discuss them on the discussion board for all students/learners to benefit.