Question

You are considering a new product launch. The project will cost $1,400,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 180 units per year; price per unit will be $16,000, variable cost per unit will be $9,800, and fixed costs will be $430,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 35 percent. Evaluate the sensitivity of your base-case NPV to an increase in fixed costs by $10,000?

Answer 1

Please refer below spreadsheet for calculation of above project NPV and Sensitivity of NPV with fixed cost.

Formula reference -

The Base -case NPV = $ 326,429.37

Now if Fixed cost cost increase by $ 10,000 then NPV would be - $ 306,686.60

which means if fixed cost increase by $ 10,000 then NPV would fall by - $ (19,742.77)

Thus, sensitivity of NPV to fixed cost is - $ 1.9742

which means if fixed cost change by $ 1 then NPV would change by $ 1.9742 in opposite direction.