Sensitivity and Economic Analysis of a Solar Car Project Report

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This report presents a comprehensive sensitivity analysis of a solar car project, examining various scenarios to assess its financial viability. It begins with an introduction to sensitivity analysis, explaining its parameters, measurement processes, and strategies, including local and global analysis approaches. The report then details the selection of key parameters such as what to vary (e.g., quantity, constraints, risks) and what to observe (e.g., benefits, decision variables), justifying their relevance to the project. Scenario analysis is conducted, evaluating present, worst, and best-case scenarios with corresponding cost structures, cash flows, and net present values. The scope of factors, including time and cost, is justified, supported by a table detailing cost breakdowns. Economic analysis is provided, presenting cash inflows, outflows, NPV, and ROI for each scenario. The report concludes with a discussion of suitable sensitivity analysis methods, risk mitigation strategies, due diligence considerations, and stakeholder information, culminating in a final conclusion on the project's feasibility and financial outlook.
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Running Head: SENSITIVITY ANALYSIS
SENSITIVITY ANALYSIS
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Table of Contents
1. Introduction..................................................................................................................................3
2. Demonstration of sensitivity analysis and parameters used along with justification..................3
2.1 Parameters Required to Conduct Sensitivity Analysis..........................................................3
2.2 Measurement process of Sensitivity Analysis.......................................................................4
2.3 Strategy of Sensitivity Analysis.............................................................................................4
2.4 Usefulness of Sensitivity Analysis.........................................................................................5
2.5 Selection of parameter and Justification................................................................................6
3. Scenario Analysis........................................................................................................................6
3.1 Present scenario......................................................................................................................7
3.2 Worst scenario........................................................................................................................7
3.3 Best Scenario..........................................................................................................................7
4. The scope of the factors and its justification...............................................................................8
5. Economic Analysis of the Scenarios...........................................................................................9
6. Result.........................................................................................................................................10
7. Suitable Sensitivity Analysis.....................................................................................................10
8. Risk and Mitigation strategy......................................................................................................10
9. Due Diligence............................................................................................................................11
10. Stakeholder’s information.......................................................................................................12
11. Conclusion...............................................................................................................................13
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1. Introduction
Sensitivity Analysis can be considered as an instrument that is mostly implemented by different
companies for getting the perfect solution for a particular company's conundrums. The
importance of sensitivity analysis and its relevance in the present era is going to be focused on
while conducting this project work. The process of due diligence is also going to be highlighted,
different stakeholders, supporters and sponsors are going to be identified in this assignment.
2. Demonstration of sensitivity analysis and parameters used along with justification
Such a process will be done under the provided set of assumptions, therefore, such an
assumption is referred to as Sensitivity Analysis (Zhang & Wallace, 2015). The usage of
sensitivity analysis depends on one or more input variable within the limited border. For
example; the change in a rate of interest5 will have an effect on the cost of bonds. Furthermore, it
helps to analyze the sensitivity of output by changing one input by keeping the other input
constant (VanderWeele & Ding, 2017). The sensitivity analysis mainly follows one principle,
"change in the model and observing the behavior".
2.1 Parameters Required to Conduct Sensitivity Analysis
There are certain parameters that are needed to be followed while conducting sensitivity analysis.
They are as follows:
- Design of Experiment: This design of experiment mainly includes the amalgamation of
parameters that need to be varied. This design helps to assign maximum and minimum values
before the start of an experiment, examine the positive and negative correlations.
- What to vary: the various parameters that can be used to vary in this sensitivity analysis model
are as follows:
The quantity regarding activities
The number of different constraints and its limits
The parameters that are technical
The aim relating to the assumption of risks and expected revenue
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- What to observe
The benefit of the aim regarding the strategy
The benefits of the decision variables
The benefits of the aim's function between the strategies that have been adopted
2.2 Measurement process of Sensitivity Analysis
The following are the steps that are needed to be done while conducting sensitivity analysis. The
steps are as follows:
In the first step, the base case value (output) is clarified. For example, the NPV (Net
Present Value) in an individual base case value (V1), in which sensitivity is measured.
The other input value of the model keep constant
In the second step, the output value at new input value (V2), by keeping other value of
input constant, is estimated
In the third step, finding the change in percentage output and input is calculated
In the fourth step, the calculation of sensitivity is done by segregating the change of
percentage input and output
2.3 Strategy of Sensitivity Analysis
There are different strategies that need to be followed while conducting the sensitivity analysis.
They are as follows:
The methods of modeling and simulation
By using MS Excel, the scenario of management instrument can be obtained
Moreover, there are two key approaches that are used to analyze the sensitivity. They are as
follows:
Sensitivity analysis Locally
This analysis is mainly numerical based analysis, its derivatives are granted in a single point
(Iooss & Lemaître, 2015). This strategy is relevant for the simple functioning of cost, this
analysis is not applicable for any feasible complicated models.
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Sensitivity analysis Globally
This is another strategy to analyze sensitivity, this analysis mainly implement the Monte Carlo
method. This approach mainly uses global examples in order to transverse the space of design.
The following are some techniques that are widely implemented across the world. They are as
follows:
- Sensitivity analysis (Differential): it is also considered as the direct method, which
includes; solving simple derivatives to time-related sensitivity analysis (Vu-Bac et al.
2016). This method is very efficient in solving equations
- Sensitivity analysis (one at a time): it is the essential method in which parameters that are
varying are applied one time only (Baio & Dawid, 2015). This analysis can also be
termed as local analysis because it indicates only the estimated point, not the distribution
(as a whole)
- Sensitivity analysis (factorial): this analysis includes the selection of provided samples
number for an individual parameter and then mobilizing the model for amalgamation
2.4 Usefulness of Sensitivity Analysis
Sensitivity analysis helps in the decision-making process
It aids in granting accurate and informed decisions
It helps to find out the occurrence of errors in the model
2.5 Selection of parameter and Justification
In order to conduct this sensitivity analysis, two parameters are selected, which are; what to vary
and what to observe (Colaizzi et al. 2016). The reason for using this two parameter are as
follows:
1. What to vary
In this what to vary context,
- The quantity that is required regarding the practicing of solar battery car can be analyzed.
It will help the solar car company to manufacture such quantity that been analyzed and
also any fluctuation occurs, this parameter will also help to identify them
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- The restriction or the limitation regarding this solar battery cars can be analyzed and also
its limits
- These parameters help to get authentic analysis regarding the risk that is going to be
faced by people by implementing this solar car battery. Moreover, it will also help to
analyze the profit that the solar car company will generate in the annual year
2. What to observe
In this what to observe context,
- The benefits that are going to achieve regarding this solar car battery strategy can be analyzed
(Van Rooij, Schoenmakers & Van de Mheen, 2017). Moreover, whether the aim of the solar
battery car strategy will able to accomplish success, can also be analyzed
- This parameter will help to find out the solutions while implementing the use of solar battery
car strategy. Moreover, it will provide recommendations regarding the solving of any problem
that a particular company will confront while implementing this solar battery car strategy
- This parameter will help to identify whether the strategy's aim, which is been adopted, will able
to accomplish success in their ongoing process
3. Scenario Analysis
The project mainly concerns of preparing a solar car and its budget structure. In order to prepare
the budget, there are three scenarios which are taken into consideration such as the present
scenario, the worst scenario, and the best scenario.
3.1 Present scenario
The present scenario justifies the present cost structure of solar car battery development which is
AUD 10000. It includes the cost of solar batteries and other necessary materials for developing
the project. The cash outflow is equivalent to the present estimated cost structure of investment
which is AUD 10000. If there is a discounted amount of 10% in the present estimated cost
structure, then the cash inflow becomes AUD 12000. This value will mainly be provided through
shares and a certain amount will be provided by taking debts too. In order to derive the net
present value of this project, cash outflow requires to be subtracted from cash inflow. Hence, if
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the chosen inflow of AUD 12000 gets subtracted from AUD 10000, then, the net present value
becomes AUD 2000.
3.2 Worst scenario
The worst scenario also justifies the cost structure of solar car battery development but the
estimated value here is much more than the present cost structure. In the worst scenario, the basic
cost structure is taken as AUD 15000. It also includes the cost structure of necessary equipments
in developing a solar car. The cash outflow is again considered equal to an estimated cost
structure of investment in the worst scenario which is AUD 15000. Although if a discounted
amount of 10% is considered in the worst scenario too, then the cash inflow becomes AUD
16000. In order to derive the net present value, cash outflow requires to be subtracted from cash
inflow. Hence, if the cash outflow of AUD 15000 gets subtracted from AUD 16000, and then the
net present value becomes AUD 1000.
3.3 Best Scenario
The best scenario again justifies the basic cost structure of solar car battery development but the
estimated value is quite less than the present scenario. Generally, the best scenario cost analysis
stays in the favor of project managers (Brooks & Deroba, 2015). Hence, the cost structure in the
best scenario would be AUD 8000. Similarly, it also includes the cost of the battery and many
other essential types of equipment. In best scenario also, the cash outflow is considered as
equivalent to the estimated cost structure of project investment which is AUD 8000. Again, a
discount of 10% is considered and with that discounted value, the cash inflow thus becomes
AUD 9500. In order to derive a net present value of these two amounts, cash outflow requires to
be subtracted from cash inflow. Hence, if the cash outflow of AUD 8000 gets subtracted from a
cash inflow of AUD 9500 then; the net present value becomes AUD 1500.
4. The scope of the factors and its justification
Payback 0.9375
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Total
cost Total cost Total cost
Battery 4500 Battery 4500 Battery 4500
wire cost 1000 wire cost 1000 wire cost 1000
Misc cost 10500 Misc cost 6500 Misc cost 4000
Table 1: Scope of factors’ justification
(Source: Created by Learner)
The main factors to be taken in this project are time and cost. Time is an important factor
because it shows the expected time of project completion (Pies, 2016). Appropriate assignment
of resources, realistic time frame is very necessary to complete a project. In this case, the
Payback period has been estimated for determining the time taken in each case. Cost is another
important factor to be considered. The project's actual cost structure should be measured against
the approved budget so that the project's development towards profit or loss can be determined.
The payback period for a present scenario is 8 months and the battery and wiring cost structure is
respectively AUD 4500 and AUD 1000. The miscellaneous cost is AUD 6500 so the present
scenario is overall profitable.
The payback period for the worst scenario is 9 months and the battery and wiring cost structure
is consecutively AUD 4500 and AUD1000. The miscellaneous cost is quite huge here, which is
AUD 10500, so the scenario is not profitable.
The payback period for the best scenario is nearly 8 months and the battery and wiring cost
structure is the same as AUD 4500 and AUD 1000. The miscellaneous cost is quite low here like
4000 so the scenario will be in a profitable zone.
5. Economic Analysis of the Scenarios
Worst scenario Present scenario Best scenario
Cash Outflow 15000 Cash Outflow 10000 Cash Outflow 8000
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Cash inflow 16000 Cash inflow 12000 Cash inflow 9500
NPV 1000 NPV 2000 NPV 1500
ROI 1.066666667 ROI 1.2 ROI 1.1875
Table 2: Economic Analysis
(Source: Created by Learner)
In the present scenario, it can be seen that the cash outflow here is AUD 10000 and the cash
inflow is AUD 12000 so the derived amount of net present value is AUD 2000. In order to derive
the amount of return on investment, the basic investment will be divided by the cost of
investment and the resultant number will be multiplied by 100. Hence, the return of investment
rate in present scenario is 1.2 %. In Australian car battery projects the general amount of return
of investment is 0.06% so compared to that the present scenario return of investment rate is
higher.
In the worst scenario, it can be seen that the cash outflow here is AUD 15000 and the cash inflow
is AUD 16000 so the derived amount of net present value is AUD 1000. In order to derive the
amount of return of investment, the basic investment will be divided again by cost of investment
and the resultant amount will be multiplied with 100. Hence, the return of the investment rate in
the worst scenario is 1.06%.
In the best scenario, it can be seen that the cash outflow here is AUD 8000 and the cash inflow is
AUD 9500 so the derived amount of net present value is AUD 1500. In order to extract the
return of investment value, the basic investment once again will be divided by the cost of
investment and the resultant value will be multiplied with 100. Hence, the return of the
investment rate in the best scenario is 1.18%.
6. Result
As per the report of economic analysis of all the chosen scenarios, it can be seen that the present
scenario has quite a good amount of net present value. The value is AUD 2000 so this scenario
would clearly be the most profitable and the return of investment is also justified as it is 1.2%.
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The worst scenario is clearly the least profitable as its net present value is AUD 1000 and return
of investment is 1.06%. As per payback period report also, the best scenario would generate the
profit in 8 months whereas, the worst scenario would take 9 months to generate profit. Hence, it
can be stated that the present scenario is the most profitable among them.
7. Suitable Sensitivity Analysis
In this project the local sensitivity analysis and economic analysis have been most suitable. This
is because local sensitivity analysis and economic analysis have been conducted based on
numerical data and quantitative information. This has been helpful in doing the sensitivity
analysis because some realistic and authentic statistics have been found out in this type of
analysis. Hence, it can be stated that economic and local sensitivity analysis are the most suitable
because of its ability on finding out realistic numerical data. Global analysis can’t be profitable
in this case as the real figures could not be incorporated in that approach.
8. Risk and Mitigation strategy
The cost of the solar car battery can be high, which will naturally avoid the people acquiring it
There can be the crisis in the obtaining different resources materials regarding this solar
car battery manufacturing process. The solar car company needs to preserve and store a
sufficient amount of resources that are required for manufacturing solar battery car
Many people will hesitate in acquiring solar battery car by changing their existing petrol
or diesel car. It is clear, that the solar car will not have a huge velocity of acceleration in
comparison to the petrol cars. The solar battery car will not efficiently work in the rainy
day, as the solar car will mobilize only by the energy of the sun. Therefore, it can be
considered as the huge risk for both customers who will acquire it and also for the
manufacturing company
Solar battery needs to be changed from time to time as the life of solar batteries are less,
therefore, a person who will acquire it, they need to maintain their solar car from very
efficiently
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9. Due Diligence
Due diligence is basically an investigation of strengthening investment or any other commodity
to approve all facts, such as; identifying all financial documentation (Higdon et al. 2015). In
addition, the facts can also involve anything that is considered a material. Therefore, there are
different sectors of due diligence that has to be maintained by a solar car battery company. They
are as follows:
Administration Due Diligence
In this sector of due of diligence, it involves verification of administrative related activities such
as; the number of stations, a rate of occupancy and so on. Therefore, the solar battery-car
company has to provide concrete documents regarding their workstations, the occupancy rate
and so on
Taxes of Due Diligence
This kind of due diligence includes identifying the all the taxes that a company needs to pay and
moreover it ensures accurate calculation of tax. The following are needed to maintain and review
from time to time by the solar car company. They are as follows:
- the company have to maintain authentic documents of all tax returns which includes income
tax, sales tax and so on
- Documentation regarding the NOL (net operating loss) or any deductions of carryforwards are
needed to be a review from time to time
Due Diligence of Intellectual property Right
The following are some rules that are needed to be review by the solar car company from time to
time. They are as follows:
- clearance of any pending patents are needed to be clear from time to time, therefore, the
company must have to review this
- The review regarding copyrights, brand images, and trademarks are needed to be done from
time to time
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Figure 1: Due Diligence Process
(Source: Hollander & Verriest, 2016)
10. Stakeholder’s information
The stakeholders will be the people whose investment worth will be depending upon the
project’s profit and loss (Rider, Witkowski & Mousseau, 2016). The stakeholders deserve certain
information like the project activity and scheduling. The team members who will be participating
in the project and their time schedule all should be known to the stakeholders. The portfolio of
the entire project like how it will look from external perspectives should be familiar to
stakeholders too (Hollander & Verriest, 2016). The entire contract along with project
mobilization and procurement will be provided to the stakeholders as this information will be
necessary for investing in a project. The budget controlling, risks associated with this project,
resource management and an expected amount of benefit must be shared with the stakeholder to
maintain integrity (Hirsch et al. 2016).
11. Conclusion
After conducting this project work, it is concluded that the sensitivity analysis has been
successfully implemented. The two parameters have been implemented while conducting this
analysis, furthermore, the justification for using these two parameters is concluded. The concept
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of due diligence process is concluded and the role that has to be maintained by the solar car
battery company in order to maintain due diligence is concluded. The three scenarios regarding
this sensitivity analysis have also been concluded, moreover, economic analysis has also been
conducted on these three scenarios. The identification of stakeholders, scope of cost and time,
and these two factors is concluded along with their justifications
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