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=
)
`
+
r
r
n
A
PVOAn
Birr 2 000 (8 51356) = Birr 17 027 Birr 2,000 (8.51356) = Birr 17,027.
2. In addition, we have present value of salvage converted
using 10% discount rate:
) 1 (
/
r
n
FV Pv
+
=
15
Birr 4,000 /(6.7275) = Birr 594.57.
Sensitivity analysis Sensitivity analysis
The total present value of the project
(from its operation and salvage values) (from its operation and salvage values)
would be
Birr 17,027 plus Birr 594.57 = 17,622 Birr.
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a , p ,
The net present value of the project would
be Birr 17,622-10,000 = Birr 7,622.
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1. If salvage value is abandoned, the NPV
would be:
NPV = 17,027 Birr-10,000 Birr = Birr 7,027
The project is insensitive to the change!
16
Solutions
2. If the investment cost is doubled,
the NPV becomes
-2, 378 Birr (17,622-20,000).
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With this knowledge, the project
might be rejected, redesigned, or
a
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t
might be rejected, redesigned, or
accepted knowing that an
unfavorable result has a significant unfavorable result has a significant
chance of occurring.
The project is sensitive to the The project is sensitive to the
change!
17
Solutions
3 if i d b 40 % 3. if price drop by 40 % ,
price would be 12-(12*.4) = 7.2 birr, and NPV will be:
Cash inflows for the next 20 years will be = Cash inflows for the next 20 years will be =
400*7.2 = 2,880 Birr
Cash outflows for the next 20 years will be =
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m
a
400*7 = 2,800 Birr.
Net cash flows from the operation will be = Birr,
80
a
s
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u
t
80.
The PVOA will be Birr 80 (8.51356) = Birr 681.1
Add the PV of the salvage value of = 594.57 Birr. Add the PV of the salvage value of 594.57 Birr.
Total PV of inflows = 1,275 Birr
Total investment cost of =10,000 Birr
NPV of inflows would be = -8,724 Birr
The project is sensitive to the price change!
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