Sensitivity Analyses and Contribution
Contribution
is a kind of revenue for the organization and therefore explained in similar
way to the revenue.
Example of
Sensitivity & Contribution Margin
|
Initial Investment
|
200,000
|
|
Volume of Sales
|
20,000 Units
|
|
Selling Price
|
12
|
|
Variable Price
|
8
|
|
Project term 4 years
|
|
Cost of
Capital is 10%
Solution
1.
Calculate NPV
|
Cash outflow
|
$ 200,000
|
|
Cash inflow ( $ 80,000 x 3.170)
|
$ 253,600
|
|
NPV ( 126,800-80,000)
|
$ 53,600
|
2.
Margin of safety (Contribution)
= $ 53,600/$ 253,600 x 100
=21.13%
Contribution will have to
fall by 21.13% before the NPV gets negative. In other words sales volume need
to fall by (20,000X 21.13% = 4226 units)
