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Hello John,
Its part a second portion.
Calculating the percentage fall in selling price before NPV becomes zero.
The solution provided complucates the matter in my mind. I don’t get the various turns it takes before arriving at the final solutions and the logic behind. Could you please simplify it I will appreciate it. I know its a shame that I am stuck at this at this stage of my studies. ThanksThe examiner has shown the workings in a confusing way!
The sensitivity is the NPV as a % of the PV of the flows that change (i.e. the PV of the sales revenue).
The sales revenue is $4,200,000 per year for 15 years, starting at time 4.
So the PV of the revenue = 4,200,000 x 7.191 (the 15 year annuity factor) x 0.731 (the normal 3 year factor because the flows start 3 years late – time 4 instead of time 1).
This is equal to 22,102,677Therefore the sensitivity = 383,000/22,102,677 = 1.7%
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