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IRR

Forums › Ask CIMA Tutor Forums › Ask CIMA P2 Tutor Forums › IRR

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by Cath.
Viewing 2 posts - 1 through 2 (of 2 total)
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    Posts
  • January 16, 2017 at 8:27 pm #367774
    abz12
    Member
    • Topics: 46
    • Replies: 44
    • ☆☆

    Hi Cath. i am really struggling with some of these decision making questions…. Am I missing something or is it just the nature of questions I am doing?

    Question.
    An education authority is considering the implementation of a CCTV system. details of the project are below:

    1. Life of project 5 years
    2. Initial cost 750,000
    Annual Savings:
    Labor cost- 20,000
    other costs- 5,000
    cost of capital 15% per annum

    Question. The percentage change in the annual labor cost savings that could occur before the project ceased viable is?

    January 16, 2017 at 11:22 pm #367809
    Cath
    Participant
    • Topics: 0
    • Replies: 448
    • ☆☆☆

    Hi Abz

    I think some of your concern is exam panic! – I think you are doing great and working really hard from what Ive seen so far!!

    This is a standard sensitivity analysis problem meaning we’d use the formula:

    sensitivity % of project variable = NPV/ PV of project variable x 100

    It tells you by how much the variable – e.g. labour costs would need to change before the project was no longer viable.

    Only problem here is this project is not viable to start with – if the machine costs $750,000 – its not going to be worthwhile for 5 years of savings of just 25,000 per year – that doesnt begin to make up for the initial cost of 750,000 even before we discount. Therefore we would have a non-viable negative NPV in our sensitivity calc which is illogical.

    If your figures are definitely correct then it must be a mistake in the question – maybe an extra zero has been added or is missing from one of the cashflows?

    Kind Regards
    Cath

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