Skip to contentSkip to search
Sign inRegister

ACCA FM · Guided practice (Show me how)

Chapter 10: Investment appraisal under uncertainty

Sensitivity analysis in investment appraisal

Priya has just set up a new company and estimates that its cost of capital is 15%. Her first project involves investing $150,000 in equipment with a life of 15 years and a final scrap value of $15,000. The equipment will produce 15,000 units a year, each generating a contribution of $2.75. Additional fixed costs will be $15,000 a year.

(a) Determine whether the project is worthwhile. (b) Calculate the sensitivity of the NPV to changes in: (i) the initial investment; (ii) the sales volume; (iii) the contribution per unit; (iv) the fixed costs; (v) the scrap value; (vi) the cost of capital. (c) Comment on the results.

Table factors: 15% - annuity 15 years 5.847, year 15 discount factor 0.123; 20% - annuity 15 years 4.675, year 15 discount factor 0.065.

  1. (a) Is the project worthwhile?

    Calculate Priya's project contribution present value and net present value.

  2. (b)(i)-(v) Sensitivity of each estimate

    Calculate Priya's project sensitivities to the specified estimates.

  3. (b)(vi) and (c) Cost of capital, and the comment

    Calculate Priya's project net present value at the second trial rate, estimate internal rate of return and cost of capital sensitivity, and state the interpretation.

Opening this exercise…