Sensitivity Analysis in Capital Budgeting for a Manufacturing Investment Decision in Kaduna State

Capital budgeting decisions in Nigerian manufacturing are often made under significant uncertainty regarding future cash flows, interest rates, and project lifetimes. This study conducts a sensitivity analysis of the net present value (NPV) and internal rate of return (IRR) of a proposed N500 million textile machinery upgrade investment by a manufacturing company in Kaduna State, North West Nigeria. Financial projections covering a 10-year evaluation horizon are obtained from the company's business plan, supplemented by industry data on production costs and fabric market prices. Baseline NPV and IRR calculations are performed, yielding positive NPV of N87.6 million and an IRR of 16.3 percent, marginally above the company's hurdle rate of 15 percent. Sensitivity analysis is then conducted by independently varying seven key input parameters, including sales volume, selling price, raw material cost, labour cost, discount rate, project life, and salvage value, across ranges from minus 30 to plus 30 percent of baseline values. Tornado diagrams and spider plots are constructed to visualize the relative impact of each variable on NPV. Results indicate that selling price and raw material cost are the two most sensitive drivers, together accounting for over 70 percent of NPV variance. Scenario analysis under pessimistic, base, and optimistic combinations reveals a 34 percent probability that NPV turns negative. Recommendations include contractual price stabilization and hedging of raw material costs before committing to the investment. Keywords: sensitivity analysis, capital budgeting, NPV, manufacturing investment, Kaduna State