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BRILLIANT’S Analysis of Risk and Uncertainty in Investment Decisions 489

Fixed cost 20
Depreciation 25
Pre-tax profit 35
Taxes 17.50
Profit after taxes 17.50
Cost of capital 10%
Calculate the accounting and financial break even point from the above information.
[Ans. Accounting BEP = 112.50; Financial BEP = 190.93 lakhs]
SENSITIVITY ANALYSIS
5.2.5 Ajanta corporation is considering the risk characteristics of a certain project. The firm
has identified that the following factors, with their respective expected value, have a
bearing on the NPV of the project:
Initial investment ` 30,000
Cost of capital 10%
Quantity manufactured and sold annually 1400
Price per unit ` 30
Variable cost per unit ` 20
Fixed cost ` 3,000
Depreciation ` 2,000
Tax rate 50%
Life of Project 5 years
Net salvage value Nil
Assume that the following underlying variables can take the values as shown below:

Underlying variable Pessimistic Optimistic

Quantity manufactured and sold 800 1,800
Price per unit ` 20 ` 50
Variable cost per unit ` 15 ` 40

(a) Calculate the sensitivity of Net present value to variation in
(i) Price per unit (ii) Variable cost per unit
[Ans. (i) a. (` 5,360) b. (` 41,372) c. (` 70,455);
(ii) a. (` 5,360) b. (` 9,151) c. (` 1,09,606)]

DECISION-TREE
5.2.6 Mr. John is considering an investment proposal of ` 10,000. If machinery has a useful life
of 2 years without any scrap value. The expected returns during the life of investment are
as under: