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Hi John,
In this question, we were asked to calculate the sensitivity of the investment in the new machine to change in selling price.
So as per your formula, NPV/PV of whatever changes
It should be NPV of the machine/ PV of sales revenue.
But the examiner has also considered deducting the tax liability as well in the calculation of PV of sales revenue. Is that necessary? Can’t we just include the Sales revenue part and ignore the tax liability.
Also if he had asked for sensitivity in case of any other variable such as Variable costs and fixed costs, should we still consider the tax liability part in calculating their PV.
I will answer you, but in future you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.
The tax certainly has to be taken into account. If the sales revenue falls, then automatically the tax will change as well. You need to take into account everything that is affected by whatever we are looking at the sensitivity of.
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