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I am doing a question called CTC in bpp revision kit. (Question 4).I am struggling to find an answer for question b(11). I would appreciate if anyone can explain to me how to work this out. I am studying at home and really stuck with this question.
Knowing that to make Nellie financially viable, you must achieve a breakdown in the NPV figure of at least zero. This means increasing the current C/S ratio from 50% in order to increase the NPV from negative $426,392 to zero.
Hence, you just simply take the sales revenue of all three years, discounted to its present value and arrive at the increase in % of C/S ratio (assuming as ‘A’).
The working goes like this (answer in millions):
(4 mil x 0.893 x A) + (9 mil x 0.797 x A) + (5 mil x 0.712 x A) = 0.426392 mil
14.305 A = 0.426382
A = 0.02985 or 2.985%
Minimum C/S ratio needed = 50% + 2.985% = 52.985%
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