In: Finance
We are evaluating a project that costs $670,000, has a life of 5 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 59,000 units per year. Price per unit is $44, variable cost per unit is $24, and fixed costs are $760,000 per year. The tax rate is 23 percent and we require a return of 16 percent on this project.
What is the sensitivity of NPV to changes in the sales figure? (Change)NPV/(change)Quantity What is the sensitivity of OCF to changes in the variable cost figure? (change)OCF/(Change)VC |
Year | Sales(unit) | Revenue (Sales*Price/unit) | Variable Cost (Unit*VC) | Fixed Cost | Depreciation (Initial Cost/5) | PBT (Revenue-VC-Fixed Cost) | Tax( (PBT-Depreciation)*tax rate) | PAT (PBT-TAX) | Discounted Present Value (PAT/1.16^year) |
0 | 0 | -670000 | 0 | 0 | 0 | -670000 | 0 | -670000 | -670000 |
1 | 59000 | 2596000 | 1416000 | 760000 | 134000 | 420000 | 65780 | 354220 | 322018.2 |
2 | 59000 | 2596000 | 1416000 | 760000 | 134000 | 420000 | 65780 | 354220 | 292743.8 |
3 | 59000 | 2596000 | 1416000 | 760000 | 134000 | 420000 | 65780 | 354220 | 266130.7 |
4 | 59000 | 2596000 | 1416000 | 760000 | 134000 | 420000 | 65780 | 354220 | 241937 |
5 | 59000 | 2596000 | 1416000 | 760000 | 134000 | 420000 | 65780 | 354220 | 219942.8 |
NPV (Sum of all Present Value) | 672772.5 |
For sales of 59000 unit NPV is 672772.5 and using the same model if sale is 50000 then NPV becomes 147369.4. So, sensitivity= change of NPV/change of quantity=(672772.5-147369.4)/(59000-50000)=$58.37
Similarly, in the above scenario OCF(PAT+Depreciation) =488220 when VC=24 and OCF=442790 when VC=25
So, sensitivity= (442790-488220)/(25-24)=$-45430