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habibat says

Hi Mr John,

I still dont understand how you arrived in the postive and negative sign from question i to v.

can you please explain how you derive at the figures being -tve or +ve.

many thanks

John Moffat says

What you have to ask yourself is will it make the NPV worse if it gets higher or lower.

So, for example, as far as the revenue is concerned, we are only worried if it should fall – so the sensitivy is negative (it measures the percentage fall that we can afford).

But as far as the cost of capital is concerned, we are only worried if it should increase – so the sensitivity is positive (it measures the percentage increase that we can afford).

habibat says

Wow, Now i understand. Many thanks for your quick response.

Your lectures has been great!

John Moffat says

Thank you

acca2050 says

Hey John, Why u didn’t do cost of captial sensitivity? However I done it by my self and the IRR comes = 15.842%. I took 20% as another npv that resulted in ($26306).

Now as per your formulae: NPV/PV of changes x 100% = 15%/15.842% x 100% = ~95%

BUT I think its wrong?

John Moffat says

Errrr….yes you are wrong

The change is 15.842-15 = 0.842.

So the percentage change from the actual cost of capital is 0.824/15 x 100% = 5.5%

(The answers to all of the examples are at the back of the Course Notes )

acca2050 says

ok cool

Oboro says

Pls sir I still do not understand why sales volume is -2.2%

John Moffat says

At present the NPV is 5329, and we need to know the % fall in sales volume that will give NPV of zero.

If the sales volume per year falls, then the contribution per year falls, and therefore so too will be present value of the contribution flows. At present the present value of the contribution flows is 241189 – we need this to fall by 5329, which is a 2.2% fall.

kaish says

and what about section c answer?

John Moffat says

You can find the answer at the back of the course notes.