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Hi John
Can you please help me with this query.
It is regarding Sensitivity Analysis on Price Increases
The question asks about the selling price % change to have ZERO NPV
The NPV of the project is $7,801m
The PVs of the Sales are $57,920m
So i would have obtained 13.46% (NPV/PVs)But I cannot understand why they are taking 75% of the PVs??
The question does say that there is a 15% chance that Year 1 will potentially have negative cash flows of $1m or more.
Thank you so much.
It is because there is tax at 25%. So if the selling price falls by $1 then the profit falls by $1 and therefore the tax falls by $0.25. So the fall in cash flows is $0.75
Stupid of me John, I should have easily realised and picked that one up.
I suppose this is the problem with this paper, so many factors to be on the look out (but then again should apply for all papers I guess….)
Thank you so much John, you are a great help. I will never forget that (thanks to your invaluable advice).
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