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in part a i while calculating sensitivity analysis why only PV of first three years 2.5+1.081+1.137=$4.718 are added and used to calculate annual cash flow of 0.897
please explainThey are not only looking at three year.
The third PV of 1.136M was calculate using the annuity factor and includes all the last cash flows.
isn’t the last amount reflecting the last 15 yeear pv 5.099m which is not taken into account for sensitivity analysis
For the NPV to be zero, the PV of all of the later inflows has to be equal to the PV of the investing outflows (because the outflows will not be affected by the sales changing)
HI. is there an alternative way of calculating the percentage fall in the selling price that would need to occur before the NPV falls to zero.the examiner`s answer is not logical for me to grasp.thanks
For part (a), I don’t understand why PV of net cash inflows are $970,000 x 7.191 x 1.11^-3.
I thought should be $970,000 x (7.839 – 2.444).
7.839 (DF@11% for Year 19)
2.444 (DF@11% for Year 3)Ibrahim: Have you watched my free lectures on risk and uncertainty, because this isa sensitivity analysis
Kevinchin: The first cash flow is at time 4 and the last cash flow is 15 years later which is time 18 (not 19). So you can either take the annuity factor for 18 years and subtract the annuity factor for 3 years, or alternatively (as the answer has done) take the 15 year annuity factor and then discount the answer for 3 years because it starts 3 years later (time 4 instead of time 1).
Both ways will give the same answer (apart from a bit of rounding, which is irrelevant in the exam). The only problem with the first way is that the tables do not go up to 18 years which means you have to calculate the factor yourself, which takes a bit longer.
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