Question Three

YUKAA PLC is considering a project with the following most likely cash flows

Years Purchase Running Savings costs costs K000 K000 K000

0 (7,000)

1 2,000 6,000

2 2,500 7,000

The cost of capital for the project is 8%.

Required:

1. Measure the sensitivity (in percentages) of the project to changes in the levels of expected costs and savings.
2. Suggest the possible drawbacks of sensitivity analysis