Sensitivity Analyses and Variable
Cost
Example of
Sensitivity & Variable
|
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.
Calculate present Value of Variable Cost
|
Variable
Cost ( 20,000 @ 8 )
|
160,000
|
|
Annuity
Factor 4 years
|
3.170
|
|
Present
Value of Variable Cost
|
$
507,200
|
|
|
|
|
|
|
3.
Margin of safety for contribution
= $ 53,600/$ 507,200 x 100
=10.56%
Cost is to be raised by
10.56% to bring the NPV to the level of Zero. Therefore variable cost is more
sensitive to the NPV .
