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Disha N says

Hello John,

I have a question in the BPP revision kit question 16 Arbore. The requirement is to calculate the sensitivity of the selling price. My first question is why was the PV of the investment has been divided by the annuity? Secondly, why has this figure been added to the cost if we are looking for the selling price sensitivity. Lastly, in the BPP kit there is a similar requirement for question 13, which is Fernhust, the calculation however was based on the usual NPV of Project/NPV of Sales Revenue. I am not sure why there is the difference in calculation. Thank you so much.

John Moffat says

The sensitivity is the % change for the NPV to be equal to zero.

For the NPV is zero then the PV of the revenue must be equal to the PV of the costs, therefore the PV of the revenue must equal 4,717,000.

If the revenue for an NPV of zero was equal to X, then the PV of X per year for years 4-15 is equal to X (7.191 x (1/1.11)^3) and this is equal to 4,717,000.

mayjeng23 says

Hi sir, I am not really sure about the fixed overheads per year. The question states that it increase by $140,000 per year, but what is the possible explanation of just taking the annuity value of $140,000 instead of increasing year by year?

John Moffat says

You are misreading.

Suppose you are currently paid 10,000 per year. Suppose I tell you today that I will increase your pay by 2,000 a year. I think you would expect that you will now be paid 12,000 a year.

I do not think that you will expect me to pay you 12,000 next year and then 14,000 the year after and so on ðŸ™‚

(Maybe I will increase your pay next year, but maybe I won’t – from now on you will be paid 12,000 a year until I say differently ðŸ™‚ )

mayjeng23 says

Thank you sir! I think I got it! there is a difference between increase per year and increasing every year. Thanks. ðŸ™‚

gumeden says

Thank you very much for the lecture. Just a question pls. The question asks us on the sensitivity p.a . Why are we using the figures based on the fifteen years and not annual figure

John Moffat says

If the annual figure changes then it will change for every year and therefore the present value of all 15 years will change.