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Sir, there is a question no 16 in bpp exam kit, Arbore case study pg no 20, asking calculation of npv of one of its project & sensitivity analysis wrt sales
Sir, as per my computation npv is coming around $595660 & sensitivity analysis of 11.21% (by following this formula- (NPV/Revenue)*100. However in the published answer their npv is $381000 & sensitivity analysis of 1.7%. Sir, am i missing something? don’t know why my answer is not matching. Kindly help
Regards
I do not know how you arrived at an NPV of $595,660.
The printed answer is correct.
The outflows at time 1 and time 2 are discounted at 11%.
The inflows start at time 4 and last for 15 years. So we discount using the 15 year annuity factor and then multiplying by the 3 year ordinary factor because the annuity starts 3 years late (at time 4 instead of time 1).Sir, the difference in NPV was due to different PVAF figures, as per my calculation annuity factor from 4th year till 15th year is coming around 5.478 but as per bpp it is being calculated @ 5.2566. That’s the reason my npv was not matching with the answer but sir if in the exam the same situation occurs will acca give full marks?
Also sir kindly explain me regarding the logic behind the calculation of Sensitivity analysis.
Thanks & Regards
The flows are not from the 4th to the 15th year. The question says that there are 15 years for flows and they are therefore from time 4 to time 18. I wrote in my previous reply how to discount the flows.
The only thing that is changing is the sales revenue and therefore the PV of the sales revenue.
For the NPV to fall to zero, the PV of the sales revenue needs to fall to zero. Therefore the % fall is the NPV as a % of the PV of the sales revenue.This is revision from Paper FM (was F9) and so if you are still unsure watch my Paper FM lectures on ‘investment appraisal under uncertainty’ – the first example in that lecture does explain it 🙂
Sir if i do sensitivity analysis by way of (NPV/Revenue)*100 i.e.% change in sale that would cause NPV to be zero. If i put the values in the formula it is coming around -7.47% but the answer is -1.7%. If sales fall by 7.47% the NPV would be zero but how they calculated @ 1.7% is beyond me.
I do not know how you arrived at 7.47%.
The NPV is $0.381 (as per the answer).
The PV of the revenue of $4.2 per year from time 4 to 18 is 4.2 x 7.191 x 0.731 = $22.078
Therefore the sensitivity = 0.381 / 22.078 = 1.7%
Ok sir, understood both the NPV & Sensitivity parts, but sir my NPV is coming around $.394m and Sensitivity of 1.78%. Slightly different from the answer. Was it due to approximation.
If you used tables to do the discounting then you have made a mistake because you should have ended up with an NPV of $0.381m.
If you used your calculator instead of tables then they will be a difference due to the fact that the tables are rounded to 3 decimal places. If this is the reason then it doesn’t matter.
(And the final answer does not carry any marks – the marks as always are for the workings, provided obviously that the workings are clear to the market 🙂 )
the values were computed on calculator, i have taken 3 places decimal that might be the reason for minor difference.It was indeed a good question and on careful reading of the question again & again,i m able to solve it. Thank you John for your guidance.
Regards
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