Sensitivity & Revenue
Sensitively
margin in respect of revenue is calculated to show that how much revenue will
have to fall before the NPV become zero i.e. Margin of safety and this is
calculated with the help of following formula.
Margin of safety
Revenue = Net Present value / Present Value of Revenue
Example of Sensitivity & Revenue
A project initial
investment is expected to be $ 80,000 and it will generate cash flow of $
40,000 for three years. The cost of capital is 10% .Calculate Margin of safety
for revenue
Solution
1.
Calculate NPV
|
Cash outflow
|
$ 80,000
|
|
Cash inflow ( $ 40,000 x 3.170)
|
$ 126,800
|
|
NPV ( 126,800-80,000)
|
$ 46,800
|
2.
Margin of safety for revenue
= $ 46,800/$ 126,800 x 100
=36.9%
Revenue is to fall by
36.9% before it will touch the Zero NPV.
