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hi
i am currently having difficulties in part b ii question childrens toy companythe question goes like that
calculate the minimum target contribution to sales ratio at which nellie the elephant will be financially viable, assuming that all other data remain unchangedto my understanding this is sensitivity analysis
the formulae is NPV / PV of cash flows affectedi am having difficulties in understanding which PV of cash flows is affected since it says contribution to sales ratio
i know contribution to sales ratio there is contribution involved that might be affected and there is sales figure which i can calculate the PV and put in the formulaehow am i suppose to know which one to take? either the contribution PV or the sales PV?
i would appreciate if someone could kindly help me out please
No. In this part of the question, the sales revenue stays the same, but the contribution earned from each $1 sale has to incease from $0.5 to a higher figure to eradicate the initial negative NPV.
Here’s the ACCA working:
Let X = the change in the contribution to sales ratio (%)
For Nellie the Elephant to become financially viable, an increase in the contribution to sales ratio (%) is required [to eliminate the negative NPV of $426,932. This
can be calculated as follows:(4 x X x 0·893) + (9 x X x 0·797) + (5 x X x 0·712) = 0·426932
i.e 3·572X + 7·173X + 3·56X = 0·426932[Note in the first term 4 x X x 0.893, 4 is the first year sales X is the increase in C/S, 0.893 is the discount factor similarly for other terms]
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14·305X = 0·426932
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X = 0·02985
This means that the required contribution to sales ratio (%) = 0·50 + 0·02985 = 0·52985 or 52·985%. This would
result in a net present value = 0.
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