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calculation of sensitivity
i didnt understand why we are dividing pv of initial investment by 7.191 *0.731 and why adding with cost to know sales revenue fall ? can you help me with logic and calcs?The sensitivity is the NPV divided by the PV of the revenue flows. (If you are unsure about this then watch the Paper F9 lectures on sensitivity).
The revenue is 300,000 x 14 = 4.2M per year starting from year 4 and lasting 15 years.
So to get the PV of the revenue, you multiply by the 15 year annuity factor, and then by the normal 3 year factor (because the annuity starts 3 years late – time 4 instead of time 1).
So the PV of the revenue = 4.2M x 7.191 x 0.731 = 22.0778MThe NPV is 0.381
Therefore the sensitivity = 0.381/22.0778 = 1.7%
thank you,you made it simple .The calculation in bpp looks complicated ,they have added and then divided… :/
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