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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.
I also have something I cannot understand in Part (a). In the answer provided, it states that the 2.78 years calculated for the duration means it takes “2.78 years to recover half the present value of the project”. I thought it means 2.78 years to recover the investment into the project? I am not able to work out the logic of this statement.
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