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Dear tutor,
I have watched ur lecture online, but sadly there was no calculation of sensitivity in cost of capital
Can u show me how to calculate this?
IRR is the rate where there is a breakeven expressing in percentage terms. How much NPV should we afford to lose before resulting in negative NPV
Im very confuse whether IRR is a sensitivity in cost of capital or we calculate sensitivity in cost of capital based on IRR?The sensitivity of the cost of capital = (IRR – cost of capital) as a % of the cost of capital.
So if the cost of capital is 10% and the IRR is 12%, then the sensitivity of the cost of capital = (12 – 10)/10 = 20%.
i.e. the cost of capital can change by up to 20% before the NPV becomes negative.
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