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Chapter 6

b)

(i) Sensitivity to initial investment = $28,400/$(220,000) × 100 = 12.9%

(ii) to sales price = $28,400/$828,000 × 100 = 3.4%

(iii) to variable costs = $28,400/$(414,000) × 100 = 6.9%

(iv) to sales volumes = $28,400/($828,000 – $414,000) × 100 = 6.9%

(v) to fixed costs = $28,400/$(165,600) × 100 = 17.1%

(vi) to discount rate – calculate the IRR:

df/af 15%

t0 purchase (220,000) 1 (220,000)
t1-4 revenue 250,000 2.855 713,750
t1-4 variable cost (125,000) 2.855 (356,875)

t1-4 fixed cost (50,000) 2.855 (142,750)
NPV (5,875)

IRR = 8 + [$28,400/($28,400 – $(5,875))] × (15 – 8)

IRR = 8 + 0.829 × 7

IRR = 13.8%

To bring the NPV to zero the discount rate needs to move from 8% to 13.8%.

This is an increase of (13.8 – 8)/8 × 100 = 72.5%

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