Define discounted measures of project worth. Explain the circumstances under which sensitivity analysis is used

Discounted measures of project worth are commonly used to evaluate the financial feasibility of investment opportunities. These measures are used to estimate the present value of future cash flows associated with a project. The rationale behind this is that future cash flows are worth less than the same amount of cash today, due to the time value of money. The discounted measures of project worth include net present value (NPV), internal rate of return (IRR), and profitability index (PI).

Net present value (NPV) is the sum of the present values of all future cash inflows and outflows associated with a project, discounted by a predetermined interest rate (i.e., the cost of capital). The NPV is a measure of the net benefit (or loss) of the project, and it is calculated by subtracting the present value of all cash outflows from the present value of all cash inflows. A positive NPV indicates that the project is expected to generate more cash inflows than outflows, while a negative NPV indicates the opposite. A higher NPV indicates a more financially attractive project.

The internal rate of return (IRR) is the discount rate that makes the present value of future cash inflows equal to the present value of future cash outflows. The IRR can be interpreted as the project's expected rate of return, and it represents the discount rate that makes the NPV of the project equal to zero. The IRR is used to compare the profitability of different projects, and a higher IRR indicates a more profitable project.

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