- This topic has 1 reply, 2 voices, and was last updated 1 year ago by
.
- Posts
- Topics: 53
- Replies: 46
- ☆☆
I did watch the lecture , but i didnt understand this portion
to force an NPV = 0, the 4-year annuity factor, AF1-4 = 110,000/40,000 = 2.75
Proof: the NPV calculation would be (2.75 × 40,000) – 110,000 = 0From tables, the 4-year annuity factor closest to 2.75 is 2.743, corresponding to a discount rate of 17%.
In terms of sensitivity: (17 – 10)/10 = 70% sensitivity
The cost of capital can therefore increase by 70% before the NPV becomes negative.
please explain this ,
Your trying to find breakeven point
By increasing the cost of capitalTo force an NPV = 0, the 4-year annuity factor
, AF1-4 = 110,000/40,000 = 2.75Then you go along the 4 yr row
You find the nearest to 2.75
Which is 17%This is the breakeven cost of capital
So we have used 10%
We have a 7% movement
Which is 7/10 70%
- You must be logged in to reply to this topic.