Question

Net present worth (NPW) of a project is sensitive to 4 input parameters, namely: A, B, C and D. Assume that NPW= 4000-90000Pa, is the relation that gives the NPW of the project as a function of Pa, which is the percentage deviation in the factor A. Similarly, assume that NPW= 4000-40000Pb, NPW= 4000+60000Pc and NPW= 4000+70,000Pd are the functions that give the NPW of the project as function of the percentage deviations in the factors B, C and D respectively. Furthermore, all factors were varied one at a time ± 20% around their baseline values (each of Pa, Pb, Pc and Pd are varied in the interval of -20% to 20%). Select the correct statement:

		This project is most sensitive to factor A and it is profitable when Pa=-20%
		This project is most sensitive to factor B and it is profitable when Pb=-20%
		This project is most sensitive to factor C and it is profitable when Pc=20%
		This project is most sensitive to factor D and it is profitable when Pd=20%
		All given answers are not correct

Answer 1

As per the given information,

NPW= 4000-90000Pa

NPW= 4000-40000Pb

NPW= 4000+60000Pc

NPW= 4000+70,000Pd

where Pa, Pb, Pc and Pd are varied in the interval of -20% to 20%.

Looking at the statements one by one,

This project is most sensitive to factor A and it is profitable when Pa= -20%

In this case the profit will be NPW= 4,000 - 90,000 * -20%

= 22,000

This project is most sensitive to factor B and it is profitable when Pb=-20%

In this case the profit will be NPW= 4,000 - 40,000 * -20%

= 12,000

This project is most sensitive to factor C and it is profitable when Pc=20%

In this case the profit will be NPW= 4,000 + 60,000 * 20%

= 16,000

This project is most sensitive to factor D and it is profitable when Pd=20%

In this case the profit will be NPW= 4,000 + 70,000 * 20%

= 18,000

Looking above at all profit figures, we can conclude that: This project is most sensitive to factor A and it is profitable when Pa= -20%