Abstract

Sensitivity analysis is a critical tool for understanding the key drivers and risks of a project. This
study conducts a comprehensive sensitivity analysis on the Federal Housing Corporation of
Ethiopia rental building in order to identify the most influential variables and their impact on the
project's overall outcomes. Using One-at-a-time method, the analysis examines how changes in
input parameters such as unit price per m2, the area to be rented, variable cost, fixed cost and
salvage value affect the net income of the corporation. The results demonstrate that the unit price
per m2 and the area to be rented variables have the greatest influence on the net income of the
corporation. Additionally, the analysis reveals interdependencies between certain variables and
nonlinear relationships that could significantly impact project performance. These insights allow
the project team to prioritize monitoring and managing the critical variables, stress test the project
plan against various scenarios, and make more informed decisions to enhance the project's
likelihood of success. The sensitivity analysis provides a robust framework for ongoing risk
assessment and project optimization throughout the project lifecycle.
 Table of content
Abstract………………………………………………………………………………….....i

List of Figures………..…………...……………………………………………………....iii

1. CHAPTER ONE: INTRODUCTION…...………………………….……………..……….….1

2. CHAPTER TWO: LITERATURE REVIEW………...……………………………………….2

3. CHAPTER THREE: DISCUSSION AND ANALYSIS ………...……………..………...…...4

3.1 Different Types and Techniques of Sensitivity Analysis…………………..…………...4

3.2 Key Concepts and Terminology in Sensitivity Analysis……..…...………………..…...7

3.3 Real-World Applications of Sensitivity Analysis ..…………………...…………..……9

3.4 Limitations and Challenges of Sensitivity Analysis…………………………………….9

3.5 Sensitivity Analysis Formula………………….………………………………………..9

4. Project Sensitivity Analysis Example…………………………...……………………………10

5. REFERENCES……………………………………………..………………………………..14

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List of Tables
Table 1. Income tax rates in Ethiopia…………………………….……………………..……….10

Table 2. Tax depreciation rates in Ethiopia………….………………………….……………….11

Table 3. Cash flow for Ethiopia Federal Housing Corporation Rental Building project………..12

Table 4. Sensitivity Analysis for Five Key Input Variables………………………..……………13

List of Figures

Fig. 1 Sensitivity graph……………………………………………….………………….13

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 1. CHAPTER ONE: INTRODUCTION

Project sensitivity analysis is a holistic evaluation of how likely it is that a project will succeed
through data-driven forecasting. It also identifies risks, quantifies their impact, and separates high-
risk tasks from low ones. Project sensitivity is defined by both a written analysis and a
mathematical formula that includes average task durations based on past data, simulated durations
based on hypothetical models, and an average task duration for both of those projections. It refers
to the project as a whole however key phases or components of the project (like project schedules)
can also have their own sensitivity analysis. Project sensitivity is primarily used to choose the right
approach or solution to the project’s main problems based on the greatest impact.

Now we might be wondering the difference between a cost-benefit analysis and a sensitivity
analysis. A cost-benefit analysis is used to estimate the pros and cons of alternative solutions for a
project. A sensitivity analysis determines which of these solutions is the most viable given what
we know about the rest of the project. A sensitivity analysis is often used to support a cost-benefit
analysis, but can also be done independently.

Sensitivity analysis helps determine how changes in one input affect the output. Project managers
find this tool useful since it allows them to weigh the benefits and risks under different conditions.
We can see which input has the most influence on the output. In the sensitivity analysis process,
you change one input (such as cost, time, or scope) and subsequently evaluate how the output
changes. We can understand how inputs affect the outcomes by repeating the process for various
inputs. After that, we may make changes to plans as needed. Selecting the right inputs to evaluate
changes while performing a sensitivity analysis is crucial. For example, in accounting, we may
change the interest rate or the invested amount, but in project management, we may want to change
the project’s duration or the resources needed. It is important to understand how each input
influences the outcomes. For instance, we need to know how changing a project’s duration would
affect the other elements (e.g., milestones, deadlines, workloads, resource cost, etc.).

Sensitivity analysis requires input and target variables. The fields within which we want to make
changes are called input variables. The fields we want to measure the consequences of changing
are the target variables. You must develop scenarios based on your adjustments and observe
changes. After that, we may use results to make choices about undertakings. Other variables must
remain constant to determine how a change in one variable may affect a result. A “what if analysis”
can show the effect of changing an input variable on the target variable. It is important not to
change more than one input variable at a time while conducting a sensitivity analysis. If we do so,
we can’t identify which factors affect the result when making many changes at once.

To conduct a sensitivity analysis, follow these steps.

• List the input variable that can affect the project outcome.
• Change one variable while keeping the other variables intact and note the impact of this
change on the outcome.

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 • Repeat the above steps for all other variables.
• Rank the variable according to the severity of the impact. Keep the highest impact variable
at the top and the lowest at the bottom.
2. CHAPTER TWO: LITERATURE REVIEW

The study focused on the impact of change orders on labor productivity in construction projects.
It conducted a sensitivity analysis to understand how variations in project variables affect project
performance, specifically project duration. The results highlighted that project duration is highly
sensitive to changes in the project deadline, with a significant increase in duration observed after
a certain reduction in the deadline. The study emphasized the importance of sensitivity analysis in
identifying critical factors influencing system performance and making informed management
decisions. Generally, the research aimed to provide insights for project planners to mitigate
unnecessary change orders and optimize labor productivity in construction projects (Sharareh
Kermanshachi and Behzad Rouhanizadeh, 2019).

A research investigated critical risks in railway projects undertaken as part of China's Belt and
Road Initiative (BRI) (Jelena M. Andrić et al. 2019). The authors develop a novel method to assess
these risks using fuzzy and sensitivity analysis. This method relies on a fuzzy synthetic evaluation
approach. The researchers identified 24 potential risks that were then grouped into six categories:
BRI policy, external factors, environment, design process, construction process, and human
resource. The most critical risks identified were changes in design, design errors, cooperation
between China and BRI country, loan risk, complex geological conditions of terrain, and
geopolitical risk.
Here is a more detailed breakdown of the six risk categories:

• BRI policy: This category includes risks related to China's Belt and Road Initiative, such
as geopolitical risk, loan risk, and cooperation between China and BRI country.
• External factors: This category includes risks outside of the project itself, such as economic
risk, political risk, law risk, cultural and social differences, and weather.
• Environment: This category includes risks related to the environment, such as soil pollution
and site contamination, noise and vibrations, and complex geological conditions of terrain.
• Design process: This category includes risks related to the design process, such as design
errors and changes in design of the railway route.
• Construction process: This category includes risks related to the construction process, such
as poor site organization and management, failure of equipment, lack of availability of
equipment, delay of equipment delivery, poor quality of materials, delay in supplying rail
tracks and other materials, and lack of quality control of construction works.
• Human resource: This category includes risks related to human resources and project
management, such as lack of labor, poor planning and management by project manager,
poor team communication, accident occurrence, and lack of safety measures on the site.

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Another study focuses on risk analysis in construction projects, emphasizing the importance of
data quality and reliability in obtaining accurate results. Various methods such as regression
analysis, correlation, and analysis of variance are used to determine relationships between risk
factors. The research highlights the significance of combining different methods to enhance
decision-making processes and select optimal construction project variants. It also discusses the
challenges of subjectivity, limited information access, and the necessity for a flexible approach in
risk identification and management within the construction industry (Agnieszka Dziadosz and
Mariusz Rejment 2015).

An article which examines the impact of risk on construction project performance, highlighting
research gaps and recommending a broader focus on project objectives. It compares treating the
whole interaction process versus considering feedback loops and emphasizes the need for a
systematic review. A review of 54 papers identifies trends on cost, schedule, and multiple project
goals, focusing on risk assessment tools and stakeholder decision-making. Different research
methods such as SEM, simulation, and regression analysis are used to assess risk impacts and
identify critical factors. Future research should focus on more accurate assessments, novel
methodologies, and participant decision-making in project management to improve risk
management in construction projects. The text explores Monte Carlo simulation and machine
learning algorithms for risk prediction in construction projects, emphasizing the importance of
proactive scheduling and integrated risk management. It suggests using time buffers and hybrid
models to reduce reworks and schedule risks. The impact of construction risks in different regions,
the relationship between risk management and project success, and various research methods in
construction engineering and management are also discussed. Delivery decisions for highways,
schedule delays in construction projects in Algeria, machine learning model for delay risk
assessment in tall building projects, Bayesian updating application in the North Edmonton Sanitary
Trunk tunnel project, modified Fuzzy Group Decision-Making Approach for Cost Overrun Risk
Assessment in Power Plant Projects, and hybrid fuzzy system dynamics model for analyzing
impacts of risk and opportunity events on project contingency are examined (Guiliang Su and Rana
Khallaf 2022).

Another article written discusses sensitivity analysis methods in operational research,

highlighting the importance of gaining insights on model behavior. It reviews local and global
sensitivity methods, providing a unified view of associated measures. The article also addresses
methodological issues in interpreting sensitivity analysis results. Key points include the
importance of sensitivity analysis in decision-making models, the variety of sensitivity methods
available, the need to understand model inputs and outputs, and the application of sensitivity
analysis in scientific modeling (Emanuele Borgonovo, Elmar Plischke 2015).

A global sensitivity analysis method used for quantifying the impact of parameter uncertainty on
model outcomes (Daniel Harenberg 2019). It proposes variance-decomposition-based Sobol’
indices to rank parameters’ importance and univariate effects to determine the direction of their

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impact. The method involves constructing a polynomial chaos expansion of the model and
obtaining Sobol’ indices and univariate effects analytically, using a limited number of model
evaluations. The analysis is applied to several quantities of interest of a standard real-business-
cycle model and is compared to traditional local sensitivity analysis approaches. The results
demonstrate that the proposed method accurately and efficiently ranks all parameters according to
importance, identifying interactions and nonlinearities.

The sensitivity analysis (SA) of valuation equations used in investment project evaluation. The
focus is on local sensitivity analysis techniques, particularly the differential importance measure
(DIM) and its relationship with elasticity. The study applies DIM to the valuation of projects under
severe survival risk in the power generation industry. The results show that CFs that come early in
time have more relevance than CFs that come later. The study also highlights the importance of
parameter changes in determining the NPV and IRR of a project. Overall, the study provides
insights into the SA of valuation equations and its application in investment decision-making (E.
Borgonovo and L. Peccati 2003).

3. CHAPTER THREE: DISCUSSION AND ANALYSIS

3.1 Different Types and Techniques of Sensitivity Analysis

There are a large number of approaches to performing a sensitivity analysis, many of which have
been developed to address one or more of the constraints. The various types of "core methods"
(discussed below) are distinguished by the various sensitivity measures which are calculated.
These categories can somehow overlap. Alternative ways of obtaining these measures, under the
constraints of the problem, can be given.

One-at-a-time (OAT)

One of the simplest and most common approaches is that of changing one-factor-at-a-time (OAT),
to see what effect this produces on the output. OAT customarily involves moving one input
variable, keeping others at their baseline (nominal) values, then, returning the variable to its
nominal value, then repeating for each of the other inputs in the same way. For example, we can
change the interest rate, the growth rate, or the discount rate and see how they impact the net
present value (NPV) of an investment project. One-way sensitivity analysis can help us to identify
the most critical variables and the range of values that they can take.

Sensitivity may then be measured by monitoring changes in the output, e.g. by partial derivatives
or linear regression. This appears a logical approach as any change observed in the output will
unambiguously be due to the single variable changed. Furthermore, by changing one variable at a
time, one can keep all other variables fixed to their central or baseline values. This increases the
comparability of the results (all 'effects' are computed with reference to the same central point in
space) and minimizes the chances of computer program crashes, more likely when several input

4
factors are changed simultaneously. OAT is frequently preferred by modelers because of practical
reasons. In case of model failure under OAT analysis the modeler immediately knows which is the
input factor responsible for the failure.

Despite its simplicity however, this approach does not fully explore the input space, since it does
not take into account the simultaneous variation of input variables. This means that the OAT
approach cannot detect the presence of interactions between input variables and is unsuitable for
nonlinear models.

Global Sensitivity Analysis (GSA)

GSA is a more advanced technique that explores the entire input space simultaneously. Instead of
changing one variable at a time, GSA looks at all possible combinations of input values and
assesses their joint effect on the output. This approach is particularly useful when dealing with
complex models that have many interacting variables.

Global sensitivity analysis (GSA) aims at quantifying the contribution of individual random
variables 𝑿 to a quantity of interest. Sensitivity analysis can be used to screen out unimportant
variables before main analysis and to gain engineering insights about the model at hand. This
method involves systematically varying all the input variables over their entire ranges, and
measuring the contribution of each variable to the output variance. This method can identify the
most influential and sensitive input variables, as well as the interactions and dependencies between
them. However, this method can also be computationally demanding and complex, and it may
require a suitable design of experiments or sampling technique to reduce the number of models
runs.

Local Sensitivity Analysis (LSA)

LSA focuses on the sensitivity of the output to small changes in the inputs around a specific point.
It's useful when we're interested in understanding the behavior of the model in a particular region
of the input space, such as the optimal solution or a critical threshold.

There are another techniques in sensitivity analysis

Sensitivity analysis in financial analysis involves assessing how changes in key variables impact
financial outcomes. Techniques include one-way sensitivity analysis, multi-way sensitivity
analysis, scenario analysis, Monte Carlo simulation, threshold analysis, breakeven analysis, and
What-If Analysis. These methods help analysts understand factors influencing outcomes, assess
risks and opportunities, and make informed decisions.

Two-way sensitivity analysis

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Two-way sensitivity analysis is a more advanced form of sensitivity analysis. It involves changing
two variables at a time and observing how they affect the output. For example, we can change the
interest rate and the growth rate and see how they impact the NPV of an investment project. Two-
way sensitivity analysis can help us capture the interaction and correlation between variables and
the output. It can also help us create a matrix or a chart that shows the different combinations of
values and their outcomes. This method explores the effect on outcomes when two variables are
changed simultaneously. It is useful for understanding the interaction between two different factors
and provides a more complex view of risk than one-way sensitivity analysis.

Scenario analysis
Scenario analysis is another form of sensitivity analysis that involves changing multiple variables
at a time and observing how they affect the output. However, unlike one-way or two-way
sensitivity analysis, scenario analysis does not change the variables randomly or independently.
Instead, it creates different scenarios based on realistic assumptions and expectations. For example,
you can create a best-case scenario, a base-case scenario, and a worst-case scenario and see how
they impact the NPV of an investment project. Scenario analysis can help us assess the potential
outcomes and risks of different situations and events. To conduct scenario analysis effectively,
follow these steps: Define the purpose and scope of the analysis. Identify key factors and drivers
of change. Gather information and data relevant to the scenarios. Define the scenarios based on
different combinations of assumptions and drivers of change. Assess the likelihood and impact of
each scenario using a probability-impact matrix. Develop strategies and responses to address the
opportunities and challenges presented by each scenario.
Monte Carlo simulation
Monte Carlo simulation is a sophisticated form of sensitivity analysis that uses random sampling
and probability distributions to generate multiple scenarios and outcomes. It can handle complex
and nonlinear models with many variables and uncertainties. For example, we can use Monte Carlo
simulation to estimate the NPV of an investment project by assigning probability distributions to
the variables such as interest rate, growth rate, cash flows, etc. and running thousands of
simulations. Monte Carlo simulation can help us measure the variability and uncertainty of the
output and calculate the probability of achieving a certain result. It uses random sampling and
statistical modeling to estimate the probability of different outcomes in a process that cannot easily
be predicted due to the intervention of random variables. - Particularly useful for understanding
the likelihood of different outcomes when variables are subject to uncertainty and variability.

Break-even analysis

Break-even analysis is a special form of sensitivity analysis that helps us to determine the level of
sales or output that is required to cover the total costs of a business or a project. It can help us
evaluate the profitability and feasibility of our operations and decisions. For example, we can use
break-even analysis to find out how many units we need to sell or how much we need to charge to

6
break even or make a profit. Break-even analysis can help us to set our goals and strategies and
optimize our resources and expenses.

What-If Analysis

A Financial Sensitivity Analysis, also known as a What-If analysis or a What-If simulation

exercise, is most commonly used by financial analysts to predict the outcome of a specific action
when performed under certain conditions. Financial Sensitivity Analysis is done within defined
boundaries that are determined by the set of independent (input) variables. For example, sensitivity
analysis can be used to study the effect of a change in interest rates on bond prices if the interest
rates increased by 1%. The “What-If” question would be: “What would happen to the price of a
bond If interest rates went up by 1%?”. This question can be answered with sensitivity analysis.
The analysis is performed in Excel, under the Data section of the ribbon and the “What-If
Analysis” button, which contains both “Goal Seek” and “Data Table”.
3.2 Key Concepts and Terminology in Sensitivity Analysis
Sensitivity analysis is a technique that helps you understand how changes in the input variables of
a model affect the output results. It can be used to test the robustness of our assumptions, identify
the most influential factors, and quantify the uncertainty and risk of our project. In this section, we
will introduce some key concepts and terminology that are essential for conducting a sensitivity
analysis. We will also provide some insights from different perspectives, such as engineering,
economics, and statistics, on why and how sensitivity analysis can be useful for our project.
Some of the key concepts and terminology in sensitivity analysis are:
1. Input variables- These are the factors or parameters that can be varied in the model. They
can be either controllable (such as design choices, operating conditions, or policy options)
or uncontrollable (such as environmental conditions, market fluctuations, or random
events).
2. Output variables- These are the outcomes or performance measures that are of interest in
the model. They can be either quantitative (such as cost, profit, efficiency, or reliability) or
qualitative (such as customer satisfaction, environmental impact, or social acceptability).
3. Model- This is the mathematical representation of the relationship between the input and
output variables. It can be either deterministic (such as a formula, an equation, or an
algorithm) or stochastic (such as a simulation, a probability distribution, or a scenario
analysis).
4. Sensitivity measure- This is a numerical indicator that quantifies the degree of influence
of an input variable on an output variable. It can be either local (such as a partial derivative,
a slope, or an elasticity) or global (such as a variance, a correlation, or a Sobol index).
5. Sensitivity analysis method- This is a systematic procedure that applies the model and the
sensitivity measure to evaluate the sensitivity of the output variables to the input variables.

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 It can be either one-at-a-time (such as a tornado diagram, a spider plot, or a Morris method)
or all-at-once (such as a scatter plot, a regression analysis, or a Monte Carlo method).

3.3 Real-World Applications of Sensitivity Analysis

Sensitivity analysis is not just an academic exercise, it has real-world implications for decision
making. sensitivity analysis is a powerful tool for assessing the risks and uncertainties of our
project. It helps us to understand how different factors affect the outcome of our project, and how
we can adjust our decisions accordingly. In this section, we will look at some real-world
applications of sensitivity analysis in various domains, such as engineering, finance, health, and
environmental management. We will see how sensitivity analysis can help us to:

• Identify the most critical inputs and parameters of our project

• Evaluate the robustness and reliability of our project
• Explore different scenarios and alternatives for our project
• Communicate our findings and recommendations to stakeholders

Here are some examples of how sensitivity analysis can be applied in different contexts:

1. Engineering- Sensitivity analysis can help us to design and optimize complex systems,
such as bridges, buildings, aircrafts, and power plants. For example, we can use sensitivity
analysis to determine how the structural performance of a bridge depends on various
factors, such as the material properties, the load distribution, the wind speed, and the
temperature. we can also use sensitivity analysis to compare different design options and
select the one that minimizes the cost and maximizes the safety of the bridge.
2. Finance- Sensitivity analysis can help us to assess the profitability and risk of our
investments, such as stocks, bonds, options, and portfolios. For example, we can use
sensitivity analysis to estimate how the value of our portfolio changes with respect to
changes in the market conditions, such as the interest rate, the exchange rate, the inflation
rate, and the volatility. We can also use sensitivity analysis to evaluate the impact of
different strategies and policies on our portfolio, such as hedging, diversification, and
leverage.
3. Health- Sensitivity analysis can help us to analyze and improve the effectiveness and
efficiency of our health interventions, such as drugs, vaccines, diagnostics, and treatments.
For example, we can use sensitivity analysis to estimate how the health outcomes of our
intervention depend on various factors, such as the dosage, the duration, the adherence, the
side effects, and the interactions. we can also use sensitivity analysis to explore the trade-
offs and uncertainties of our intervention, such as the cost-effectiveness, the equity, and
the ethical implications.
4. Environmental management- Sensitivity analysis can help us to understand and manage
the complex interactions and feedbacks between the natural and human systems, such as
the climate, the water, the land, and the biodiversity. For example, we can use sensitivity

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 analysis to assess how the environmental quality and sustainability of our system depend
on various factors, such as the emissions, the consumption, the population, and the policies.
We can also use sensitivity analysis to examine the potential consequences and responses
of our system to different scenarios and shocks, such as the climate change, the natural
disasters, and the conflicts.

3.4 Limitations and Challenges of Sensitivity Analysis

While sensitivity analysis is a powerful tool, it's not without its limitations and challenges. As with
any analytical technique, it's important to be aware of the potential pitfalls and take steps to
mitigate them. Here are a few key issues to keep in mind.

Dealing with Uncertainty and Variability

One of the biggest challenges in sensitivity analysis is dealing with uncertainty and variability in
the input variables. In many cases, you may not have precise values for the inputs, but rather ranges
or distributions. This can make it difficult to determine the appropriate level of variation to use in
the analysis.

Interpreting the Results in Context

Another challenge is interpreting the results of the sensitivity analysis in the proper context. It's
easy to get caught up in the numbers and lose sight of the bigger picture. I always try to step back
and ask myself what the results really mean for the problem at hand.

Communicating the Results Effectively

Finally, communicating the results of the sensitivity analysis to stakeholders can be a challenge.
Not everyone is comfortable with technical jargon or complex graphs, so it's important to find
ways to present the insights in a clear and accessible way.

3.5 Sensitivity Analysis Formula

While there isn’t a single formula for sensitivity analysis, the general approach is to select an input,
modify it by a specified amount, and ascertain the impact on the output. Analysts typically vary
inputs up and down by a fixed percentage, such as 10%, to assess sensitivity. The simplistic
formula is:

New Output = Base Output x (1 + Change in Input)

For instance, if revenue is amplified by 10% from $100 to $110, the formula is:
New Profit = Base Profit x (1 + 10%) = Base Profit x 1.10

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 3.6 Project Sensitivity Analysis Example
Let's do a sensitivity analysis for 5 years regarding the rent of the building located in the Aware
area of the Federal Housing Corporation of Ethiopia. Assuming the opportunity cost of capital
(MARR) is 12%.

Building Characteristics
Building Type: 2B+G+10
Initial Investment Cost = 100,001,252 Birr
Total Building (rental) Area = 9,157 m²
Rental Rate = 250 Birr per m² per month =
= 250 Birr/m2/month*12 month = 3,000 Birr/m2 per Year

Rental Income
Yearly Rental Income = Total Rental Area*Rental Rate
= 9,157 m2*250 Birr/m2 *12 = 27,471,000 Birr
Variable Cost
Maintenance and Repairs (Yearly) = 150*9157 = 1,373,550 Birr

Operating Expenses
Utilities (electricity, water, etc.) = 443,460 Birr (But it is covered by the tenant)
Insurance cost (Yearly) = Investment Cost*0.038% = 38,000.48 Birr
Administrative Expenses
Property Management Fees (Yearly) = 5% of rental income
=27,471,000*5/100 = 1,373,550 Birr
Total Expenses (Fixed) cost = 1,411,550.48 Birr

Income tax
The tax payable on rented houses shall be charged, levied and collected at the following rates:
(a) on income of bodies thirty percent (30%) of taxable income,
(b) on income of persons according to the Schedule B (here under)
Taxable Income from rental (Per year-birr) Income tax payable

0 – 7,200 0%

7,201 – 19,800 10%

19,801 – 38,400 15%

38,401 – 63,000 20%

63,001 – 93,600 25%

93,601 – 130,800 30%

Over 130,800 35%

Table 1. Income tax rates in Ethiopia

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Since Federal Housing Corporation of Ethiopia is a body, the tax is 30% of taxable income.

Income Tax = (27,471,000-2,785,100.48-5,000,062.60)*30/100 = 5,905,751.08 Birr

Depreciation and amortization in Ethiopia

The depreciation rates range between 5% to 30% depending on the type of the asset. A taxpayer
can use either a straight-line or diminishing value basis on most of the business assets, and the
taxpayer is required to apply the sa me method of depreciation used in its financial accounts.
However, some assets, such as business intangibles and buildings/structure improvements, are
required to be depreciated on a straight-line method only.
Table 1. Tax depreciation rates in Ethiopia

Depreciation rate (%)

Capital assets
Straight-line Diminishing value

Buildings and structural improvements 5 N/A

Computers, software, and data storage

20 15
equipment

Greenhouses 10 N/A

Depreciable assets used in mining and

25 30
petroleum operations

Any other depreciable asset 15 20

Table 2. Tax depreciation rates in Ethiopia

Since the depreciation rate for building is 5% by straight line, the value is calculated as follows.

Depreciation value (Yearly) = 100,001,252x5/100 = 5,000,062.60 Birr

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Salvage Value

The formula to calculate the salvage value is as follows.

Salvage Value = Purchase Price – (Annual Depreciation × Number of Years)

Starting from the original cost of purchase, we must deduct the product of the annual depreciation
expense and the number of years.

Salvage Value = 100,001,252 – (5,000,062.60*5 years) = 75,000,939 Birr

One Time Gain Tax = Salvage Value*15% = 75,000,939*5% = 3,750,046.95 Birr

Cash flow for Federal Housing Corporation of Ethiopia Rental Building project based on most likely estimate
A B C D E F G
1 Income Statement
2 0 1 2 3 4 5
3 Revenues:
2
4 Price per m 3,000 3,000 3,000 3,000 3,000
5 Total Area (Demand) 9,157.00 9,157.00 9,157.00 9,157.00 9,157.00
6 Rental Revenue 27,471,000.00 27,471,000.00 27,471,000.00 27,471,000.00 27,471,000.00
7 Expenses:
Unit Variable Cost 150.00 150.00 150.00 150.00 150.00
Variable Cost 1,373,550.00 1,373,550.00 1,373,550.00 1,373,550.00 1,373,550.00
10 Fixed Cost 1,411,550.48 1,411,550.48 1,411,550.48 1,411,550.48 1,411,550.48
11 Depreciation 5,000,062.60 5,000,062.60 5,000,062.60 5,000,062.60 5,000,062.60
12
13 Taxable income 19,685,836.92 19,685,836.92 19,685,836.92 19,685,836.92 19,685,836.92
14 Income tax (30%) 5,905,751.08 5,905,751.08 5,905,751.08 5,905,751.08 5,905,751.08
15
16 Net income 13,780,085.84 13,780,085.84 13,780,085.84 13,780,085.84 13,780,085.84
17
18 Cash flow statement
19 Operating activities
20 Net income 13,780,085.84 13,780,085.84 13,780,085.84 13,780,085.84 13,780,085.84
21 Depreciation 5,000,062.60 5,000,062.60 5,000,062.60 5,000,062.60 5,000,062.60
22 Investement activities
23 Investement (100,001,252.00)
24 Salvage 75,000,939.00
25 Gains Tax (3,750,046.95)
26
27 Net Cash Flow (100,001,252.00) 18,780,148.44 18,780,148.44 18,780,148.44 18,780,148.44 90,031,040.49
Table 3. Cash flow for Ethiopia Federal Housing Corporation Rental Building project

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Deviation -20% -15% -10% -5% 0% 5% 10% 15% 20%

Price per m2 (5,737,103.16) (2,271,164.91) 1,194,773.00 4,660,712.00 8,126,650.00 11,592,588.08 15,058,526.32 18,524,464.57 21,990,402.82

Total Area (5,043,915.51) (1,751,274.17) 1,541,367.16 4,834,008.50 8,126,650.00 11,419,291.17 14,711,932.50 18,004,573.83 21,297,215.17

Variable Cost 8,819,837.48 8,646,540.57 8,473,243.66 8,299,946.74 8,126,650.00 7,953,352.92 7,780,056.01 7,606,759.09 7,433,462.18
Fixed Cost 8,839,015.13 8,660,923.81 8,482,832.48 8,304,741.16 8,126,650.00 7,948,558.51 7,770,467.18 7,592,375.85 7,414,284.53

Salvage Value 40,715.90 2,062,199.38 4,083,682.87 6,105,166.35 8,126,650.00 10,148,133.31 12,169,616.79 14,191,100.28 16,212,583.76
Table 4. Sensitivity Analysis for Five Key Input Variables

25,000,000.00

20,000,000.00

15,000,000.00

10,000,000.00

5,000,000.00

-
-25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25%

(5,000,000.00)

Price per m2 Total Area Variable Cost Fixed Cost Salvage Value
(10,000,000.00)
Fig. 1 Sensitivity graph

In Fig.1, we see that the project's PW is very sensitive to changes in the area rented and unit price
per m2, fairly sensitive to changes in the salvage value, and relatively insensitive to changes in the
variable costs and fixed cost. Graphic displays such as the one in Fig. 1 provide a useful means to
communicate the relative sensitivities of the different variables on the corresponding PW value.
However, sensitivity graphs do not explain any interactions among the variables or the likelihood
of realizing any specific deviation from the base case. Certainly, it is conceivable that a project
might not be very sensitive to changes in either of two items, but very sensitive to combined
changes in them.

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References

➢ Sharareh Kermanshachi and Behzad Rouhanizadeh, “Sensitivity Analysis of Construction

Schedule Performance Due to Increased Change Orders and Decreased Labor
Productivity” 2019.
➢ Jelena M. Andrić, Jiayuan Wang, and Ruoyu Zhong, “Identifying the Critical Risks in
Railway Projects Based on Fuzzy and Sensitivity Analysis: A Case Study of Belt and Road
Projects” doi:10.3390/su11051302, 2019.
➢ Agnieszka Dziadosz and Mariusz Rejment, “Risk analysis in construction project - chosen
methods” 2015.
➢ Guiliang Su and Rana Khallaf, “Research on the Influence of Risk on Construction
ProjectPerformance: A Systematic Review”, [Link] 2022.
➢ Emanuele Borgonovo, Elmar Plischke, “Sensitivity Analysis: A Review of Recent
Advances”, doi: 10.1016/[Link].2015.06.032, 2015.
➢ Daniel Harenberg, “Uncertainty quantification and global sensitivity analysis for economic
models”, [Link] 2019.
➢ E. Borgonovo and L. Peccati, “Sensitivity analysis in investment project evaluation”, 2003.

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