FM Chapter 10 Questions – Investment appraisal under uncertainty
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Hello John. I am grateful for this lecture. I have one question though:
In question 3, in calculating the sensitivity of the NPV to changes in SALES VOLUME, why is the contribution used and not the sales revenue?
Because if the number of units changes then not only does the total sales revenue change but also the total variable cost of producing those units changes as well.
In Q5 , Why is it +26%??? For NPV to fall zero , we need to reduce Investment by 26% ??
It is + because we need the initial investment to increase!! The higher the initial outflow then the lower will be the NPV.
Dear sir, can sensitivity be negative?If yes, in which case?Thank you.
Dear sir please check my above question.Thank you
Yes it can. Watch my lecture working through example 1 of Chapter 10 of the lecture notes.
Did you not watch the lecture before attempting this test?
I already watched but for a long time.I already watched again and I understand.Sorry but can I default understand that sensitivity of initial investment will always positive and sensitivity of sales column/contribution will always negative?If so, why in the Q3, sensitivity of sale column is 5.3%, not -5.3%?Thank you.
No, you cannot understand that. If a reduction in the variable is needed to result in a zero NPV then the sensitivity is negative. If an increase in the variable is needed to result in a zero MPV then the sensitivity is positive,
In the comment belo yos say „ If a reduction in the variable is needed to result in a zero NPV then the sensitivity is negative“. But in the third question, we state that sensitivity is +5.3% even though a reduction of the revenue/contribution is needed to result in a zero NPV. How come? Thanks a lot!
The choice of answers do not specify whether positive or negative – they are testing just on the % amount.
Sir could you please tell me about the minimum acceptable contract price and how to calculate it
Which of the test questions are you referring to?
in question, 2. is using the joint probability not valid
You could certainly use joint probabilities, but it would take a lot longer and the final answer would be the same.
Thanks for the questions sir. I enjoyed solving them.
Thank you for your comment (but do make sure that you have a Revision Kit from one of the ACCA approved publishers because they contain lots more questions for practice) 🙂
Dear Sir,
Why question 1 statement 2 is not correct?
The expected net present value is the value expected to occur if an investment project with several possible outcomes is undertaken once.
Thanks
Not at all. The actual NPV depends on the actual returns.
The expected NPV will only occur if the investment is undertaken lots of times – it is the average of all the possible NPV’s.
Dear Sir,
True. I have misunderstood the question.
Thanks a lot for your reply
Gabriella
You are welcome 🙂
For Q 3 if the sales volume change, doesn’t the sales revenue pv change too?
Yes of course. But if the volume changes then the variable costs will change also.
So it is the contribution that will change.
(You really should watch my free lectures on this. Our lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)
I have watched the lecture….just got a little confused there. All clear now.
Thanks for a bunch of great lectures-really clear!
Thank you for the comment 🙂
Dear sir, correct me if im wrong, for question no 5, we should get -26%, if the NPV is negative, am I correct? Thank you, sir.
The NPV will only fall if the initial investment is higher by 26%. So the sensitivity is + 26%