Sept/Dec 2016 Sensitivity of selling price

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December 4, 2018 at 12:33 am #487091
jayped
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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.
December 4, 2018 at 7:31 am #487122
John Moffat
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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
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