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  3. Dear John, thank you for your lectures, they are great 馃檪
    I have a question with regards to the units of production. Your example above is 15,000 per year, but what if i have different numbers of units per year, do i add the total and continue following the rest of the equation?
    Thank you

      • Thank you for your reply. My scenario is for 5 years with different units per year, i add the total of all units and use the cumulative pv table at 12% for 5 years, is this correct?
        Thank you once again

      • No – you can only use the annuity tables if there is an equal cash flow each year. If the units change each year then you discount using the present value tables for each year separately.

  4. sir you said that the rule to obtain sensitivity is npv/ pv of flows affected. what would happen if say more than one flows get affected ? will pv of of both the flows be added up and substituted in the formula you mentioned to get sensitivity?

  6. Dear sir,

    If there are more than one critical factors, hence the investment has high uncertainty. Can we decide after sensitivity analysis that we should not go ahead with this investment as we may most probably lose money?

    To further confirm our decision, should we perform some of the below analysis:?
    1. Probability analysis – Expected values
    2. Using risk-adjusted discount RATE
    3. Adjusted payback PERIOD
    4. Simulation

    So before accepting an investment from the proposed investments/projects, we do the above analysis to assess its risk and then decide to accept it or not.

    Please see if I need correction. Thanks.

    • You are correct, except that you will not automatically decide not to do a project – it is just that the more uncertainty there is the more you might decide not to risk going ahead.

      It is not a problem in the exam – you accept or reject based on whether the NPV is positive or negative. But for written parts you must be able to discuss the relevance of uncertainty.

      • I take from this that we have to be extremely careful with reading the question and determining what is being stated.

        In Lease buy example it states “will have a scrap value after 4 years of $10,000.”

        Whereas in this example it states “final scrap value of $15000”.

        I do find this tricky, because if someone tells me there will be a final value of拢xxxx. I take that to mean that is the amount that will be available.

      • You certainly have to read the question carefully.
        In the lease buy question it is made very clear that the scrap value is only relevant if the machine is purchased.
        In the sensitivity question is says that the final scrap value is 15,000, and scrapping can obviously only occur at the end of the projects life!

  8. Hello, Mr. Moffat!
    I got the overall idea, but confused with sensitivity for sales volume. Can we use PV of revenue instead of contribution? Follow the same logics: if sales volume fall by 10%, revenue fall by 10% and PV fall by 10%. Same as for contribution.
    Why don’t we have the same answer as for contribution, if everthing else remain constant?
    (The question appeared while practicing specimen exam for Sept.2016, question 2).
    Thank you in advance!

  10. Mr. Moffat, am I correct in saying that when calculating the PV for Cash inflow in Question 1 (a) only using contribution and not price can only be done if price (and variable cost) remain constant?

  11. Hi John,

    Something that worries me is that I understood the whole lecture but I got parts iv and v wrong because in both cases I divided the NPV by the fixed costs (15,000) in part iv and by the scrap value (15,000) in part v and consequently got the wrong answer.

    But my understanding was that I wanted to know the percentage change in fixed costs or scrap value because that would ultimately bring the present value of that particular flow down by the same percentage resulting in a NPV of zero and that’s what we are doing, aren’t we. Where am I wrong then?

    Thanks in advance!

    • For the NPV to end up at zero, the PV of the relevant flow has to change by the amount of the current NPV.

      So, for example, if the NPV is 100, and the PV of the fixed costs is 1,000. Then for the NPV to fall by 100 to zero, the PV of the fixed costs will have to increase by 100.
      In percentage terms this is 100/100 = 10%
      It is always the NPV divided by the PV of the flows that change (expressed as a %).

    • You take exactly the same approach as for the others.

      Calculate the present value of the revenue flows (because they are the flows that will change if the selling price changes).

      The sensitivity is then the NPV as a percentage of the PV just calculated.

      • Dear sir in example in solution for senstivity of cost of capital

        by using IRR rate 15.84% and given rate is 15%

        in calculation of senstivity of cost of capital you do.
        0.84梅15 why you do like this bcoz by formola as you told it will be NPV 梅 pv of variables

      • It should be clear that it would be silly to divide a % by a PV. For cost of capital we have to go back to the basis logic and divide the change needed (0.84) by the current value (15)

    • For this particular example we can not, because we do not know the estimated selling price.
      In general terms you would take the same approach as the others i.e. express the NPV as a % of the present value of those cash flows that would change (which in the same of the price would be the sales revenue flows).

      • you mean NPV/ present value of sales revenue? this will give me the percentage change in sales revenue. I am preparing for P4 and there is this question Dec 2012 question that asked for this. when i tried going through the solution i didnt understand how it was solved. If use this your approach i will get the percentage change in sales revenue but the question asked for sales price

      • But surely, if the sales price changes by 10% then the revenue changes by 10% as well!
        (I know it could be affected by other things, but with sensitivity we can only consider one item at a time)

        One other thing is that if there is tax in the question, then the flows that will change if the selling price changes will be the revenue and the tax on the revenue. So you need the net PV of these two. Then express the NPV of the project as a % of it.

  15. Thanks John,
    an issue here,when we are calculating the sensitivity of change on for example part (iii) which is contribution p.u, why do we put that negative sign yet in our table the final value was a positive??

  16. Now the F9 carries a MCQ do I need to read the text book from cover to cover, or your notes, lectures and the kit will be sufficient to help me pass the exam.

    • Its not really a question of calling it the optimum.

      The problem is that we are making a decision on forecasts of cash flows, and therefore the actual cash flows may turn out to be different – if they are different then the NPV might turn out to be negative and then we will have made the wrong decision.

      The higher the sensitivity the less the chance is of that flow changing enough to affect the decision. However if the sensitivity is low, then it means that even just a small change in the flow will affect the decision. Therefore the lower the sensitivity the more risk we are taking and therefore the more we will try to estimate the flow accurately (or else maybe decide not to take the risk).

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