Sensitivity and investment apparaisal

MIMuhammad Irfan7y ago

Hi I want to ask that how we calculate the sensitivity of change in selling price as there is a requirement in one of the question in the Kaplan kit called WARDEN CO which i did'nt fully understand? following is the data: NPV = +103,000 Revenue = 1,600,000 Tax @ 30% one year in arrears Life = 5 years Cost of Capital = 11% Tax Dep'n = NIL

John MoffatTutor7y ago#1

I do not have the Kaplan Kit - only the BPP Revision Kit. However for every $1 increase/decrease in the revenue, there will be a $1 increase/decrease in the profit, and therefore a change in the tax charge of 30% of change in the revenue. Therefore you need to take the normal approach (as explained in my free lectures) and calculate the NPV as a % of the total PV of the revenue flows and the PV of the tax on the revenue flows.

MIMuhammad Irfan7y ago#2

Thanks

John MoffatTutor7y ago#3

You are welcome :-)

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