Sept/Dec 2016 Sensitivity of selling price

JJamie7y ago

Hi John, Section B question 2 (b) of the Sep/Dec 2016 paper asks to calculate the % change in the selling price required for the investment to have a zero NPV... Can you please tell me why our discounted revenue cash flows are multiplied by 0.75? Are we calculating the after-tax revenue cash flows then discounting? Thanks.

John MoffatTutor7y ago#1

Yes. For every $1 change in the revenue, the profit will change by $1 and therefore the tax will change by $1 x 0.25. So the net effect is a change of $1 = 0.25x$1 = $1 x 0.75