Page 165 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes 9. What is sensitivity analysis? What are its advantages and limitations?
10. KC company is considering two mutually exclusive projects. The initial cost of both
projects is 5000 and each has an expected life of four years. Under three possible states of
economy, their annual cash flows and associated probabilities are as follows:

Net Cash flow ( )
Economic state Probability Project A Project B
Good 0.3 6000 5000
Normal 0.4 4000 4000
Bad 0.3 2000 3000

Answers: Self Assessment

1. Capital budgeting 2. Reversible
3. Two-sided 4. Incidental
5. Minimum 6. Profitability index
7. Internal rate of return 8. Negative
9. capital rationing 10. Zero

11. capital investment 12. Risk
13. Variability

6.11 Further Readings

Books Chandra, P., Financial Management - Theory and Practice, New Delhi, Tata McGraw
Hill Publishing Company Ltd., 2002, p. 3.
Dr Pradeep Kumar Sinha, Financial Management, New Delhi, Excel Books, 2009.
Van Horne, J.C. and Wachowicz, Jr, J.M., Fundamentals of Financial Management,
New Delhi, Prentice Hall of India Pvt. Ltd., 1996, p. 2.

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