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Hi
My question related to question (b) about sensitivity analysis for selling price ( selling price reduction):
My understanding of sensitivity analysis for selling price is calculated as follow:
-NPV of project/ PV of total revenue
-So calculation of percentage reduction should be:
7801/ (13250*0.901+16695*0.812+22789*0.731+23928*0.659) = 13%
-However in the BPP kit the answer is 18 % because each year revenue is reduced to 75% (0.75);
– My question actually is; why is revenue reduced to 75%? Is that tax 25% taken into account?Thank you so much,
YasmineIn future if you want me to answer then you must ask in the Ask the Tutor Forum – this forum is for students to help each other.
For every $1 change in the revenue, the profit will also change by $1. Since there is tax of 25%, a $1change in the revenue will mean a $0.75 change in the operating cash flow.
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