Question

The follow two table displays the list of variables under three cases:Pessimistic, Expected and Best.

Top table lists valule of variables, and bottom lists NPV of the change of that one variable, while holding the rest of varaibles at the value under expected case.

For example, NPV of "-$1,892" is computed using market size changed to "pessimistic" (5000), while the rest of variable all kept under expected case (for example market share 30%, price 2 etc).

Variable	Pessimistic	Expected	Best
Market Size	5,000	10,000	20,000
Market share	20%	30%	50%
Price	1.9	2.0	2.2
Variable cost	1.2	1.0	0.8
Fixed cost	1,891	1,791	1,741
Initial Investment	1,900	1,500	1,000

Variable\NPV	Pessmistic	Expected	Best
Market Size	- $1,802	$1,517	$8,154
Market Share	-696	1,517	5,942
Price	853	1,517	2,844
V.C.	189	1,517	2,844
F.C.	1295	1,517	1,628
Initial investment	1208	1,517	1903

Based on these table, to find out sensitivity of NPV against market size, which calculation is correct?

calculation 1: ($8,154-1,517)/(20,000-10,000)

calculation 2: ($8,154-(-1802))/(20,000-5,000)

calculation 3: (1,517-(-1802))/(10,000-5,000)

Multiple Choice

• Calculation 1,2,3 are all correct

• calculation 2 is correct

• calculation 1 is correct

• calculation 3 is correct

Answer 1

Sensitivity analysis is a technique which is used in Capital Budgeting decisions, which helps us in studying the impact of changes in the variables on the outcome of the project.

As given in all the above scenario's, sensitivity of NPV against market size is calculated using the figures given are

Calculation 1: ($8,154-1,517)/(20,000-10,000)

Impact of variables of Best case scenario and Expected scenario

Calculation 2: ($8,154-(-1802))/(20,000-5,000)

Impact of variables of Best case scenario and Pessimistic scenario

Calculation 3: (1,517-(-1802))/(10,000-5,000)

Impact of variables of Expected scenario and Pessimistic scenario

So, all the above calculations are correct