- This topic has 3 replies, 3 voices, and was last updated 6 years ago by
.
- Posts
Gromit,some question that required break even to make the NPV =0,break even of quantity.Exp, June 2007 question 2b(ii) ,and is there any fixed formula to solve the question? The suggested answer is confusing. Some need to include the initial investment and fixed cost. Whereas some just use the Net present value and discounted factor. Need your advice,thank you!
There is no fixed formula to find NPV = 0. I usually look at the ‘right hand column’ of the standard NPV calculation (where you end up with the discounted cash flows and add up to the NPV) and ask myself which of these figures will change as I change assumptions. So if selling price is changing the revenue figure will change. The discounted revenue figure then has to decrease by the amount of the NPV if the NPV is to hit zero. Sensitivity to selling price = NPV/discounted (total) revenue.
This is unclear to me too. In some cases, while NPV Breakeven point is calculated, npv of all cash inflows, outflows are taken to find the contribution and equated to all fixed costs except depreciation. The initial investment is ignored.
In another case, the equation used is
npv of (contribution – fixed costs) = initial investment
which is right and if both are correct, how do we choose which to use under what conditions.
- You must be logged in to reply to this topic.