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Hi sir,
Good day,
I jus want a small clarification, in this question, part b, the requirement is percentage change in the selling price required to make the npv 0?, wont that be the same as the variable cost + fixed cost? i checked the answer and im confused about it.
Kindly look into it and explain pls.
Thanks
The question is effectively asking for the sensitivity of the revenue, and this is therefore the PV of the revenue flows divided by the NPV. (For an explanation as to why, watch my free Paper F9 lectures on this because this is revision of F9).
The PV of the revenue is certainly not equal to the PV of the variable + fixed costs. If it was equal then there would be an NPV of zero!!!
Surely, we would always be expected the revenue to be more than the costs otherwise they would make a loss!
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