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A company is considering a project with the following cash flows.
Initial investment $11,000
Varable costs year 1 $3200 & year 2 $ 3200
Cash inflows year 1 $ 10,300 & year 2 $ 10300
Cash flows arise from selling 1,030,000 units at $10 per unit. The company has a cost of capital of 9 %.
Measure the sensitivity of the project to changes in the following variable.
Cost of capital
Sir, after calculating NPV I have received an IRR of 19.2%. Could you please explain how to find cost of capital.
The cost of capital is given in the question you have typed – it is 9% !!!
We can afford it to change by up to 10.2% (19.2 – 9) because the NPV starts to go negative,
Therefore the sensitivity is (10.2 / 9) x 100% = 113%
(Strictly it is +113%, because we only have a problem if the cost of capital increases, not if it decreases)
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