Question

17. Answer questions 17-1 through 17-4 on the basis of the sensitivity graph below and the most likely estimates given as follows: Useful Life _ (R-E) -Initial -o MARR 12% per year 5 vears Useful Life Initial Investment $5,000 Receipts-Expenses S1,500 per R-E) $3,000 $2.000 ear $1,000 10%- 30% 40% s -30% -20) r-10% os "40% (51,000) ($2000) X-Axis (Perceat Change in Parameter) 17-1. The variable to which the project is the least sensitive is: b)Useful life 17-2. If the initial investment is increased by more than 9%, the project is profitable. b) False 17-3. If the profit (RH) is decreased by 5%, this project is not profitable. b)False 17-4. This project (based upon the most likely estimates) is profitable. b)False a) R-E c)Initial Investment a) True a) True a) True 19 ?% what is the nominal interest rate per year

Answer 1

Calculation of Net present value = Present value of cash inflow - Present value of cash outflow.

Present value of cash inflow = Future values ( P/A, r n)

Present value of net  receipts = $1500 ( P/A, 12%, 5)

= $1500 ( 3.605)

= $5408

Present value of cash outflow = $5000

Net present value = $5408 - $5000 = $408

17-1

Sensitivity analyses :- Changes in variable where NPV become zero, ( Present value of cash outflow and inflow same )

i) Net receipts = Let say Net receipts = x

= $5000 = x ( 3.605 )

=   X :- $1387

Change in Net receipts = ($1500 - $1387) / $1500 = 7.54%

ii) Useful life = Let say useful life is X years.

= $5000 = $1500 ( P/A, 12%, X)

= X :- 4.5 years

Change in useful life = (5 - 4.5) / 5 = 10%

iii) Initial Investment = Let say investment amount = X

= $x = $1500 ( 3.605 )

= X :- 5408

Change in Initial amount = (5408 - 5000 ) / 5000 = 8.16%

Hence variable to which project id least sensitive is Net receipts ( A) [ R - E]

As shown in the graph as well R-E is near to the base line which means change in R-E has least effect on project profitability.

17-2

Increase in Initial investment = $5000 * 9% = $450

Total net profit was $408

Total increase in cost is higher than the net profit Hence investment is not profitable. False ( b)

17-3

Total decrease in net receipts =    $1500 * 5% = $75

Net Profit = $5000 - $1425 ( 3.605)

= $137.125

Investment is still profitable Hence False ( B)

17-4

Project is profitable (based on the most likely estimate ) Since it gives positive net present value. Hence True ( A)