BUSF_A01.qxd

Appendix 4 • Suggested answers to selected problem questions

Table of sensitivities

Factor Original estimate Break-even point Difference Difference as

% of original

D 2,000 units 1,871 units 129 units 6%

S £4 £2.806 £1.194 30%

V £1 £1.194 £0.194 19%

r 6% 10% 4% 67%

n 3 years 3 years 0 years 0%

I £15,000 £16,038 £1,038 7%

Note that rand ncould be found with considerably more accuracy (if this were

thought to be useful) by linear interpolation.

6.5 Hi Fido plc

Cash flows

20X0 20X1 20X2 20X3 20X4

£ 000 £ 000 £ 000 £ 000 £ 000

Plant (1,000)

Tracker revenue 2,160 2,208 1,104

Materials cost (756) (773) (386)

Additional labour (97) (99) (50)

Lost Repro contributions (432) (442) (221)

Management 120 (48) (48) (188)

Working capital (243) (5) 124 124

Taxation 43 (211) (233) 54

(1,123) 865 759 150 54

Discounted at 8% (1,123) 801 651 119 40

NPV =488 (positive)

On the basis of this analysis, the project should go ahead.

Workings

Expected revenue

20X1 20X2 20X3

8,000 (0.3) 4,000 (1.0)

10,000 (0.6)

10,000 (0.7) 5,000 (1.0)

12,000 (0.5) 6,000 (1.0)

12,000 (0.4)

15,000 (0.5) 7,500 (0.1)

20X1

(10,000 ×0.6) +(12,000 ×0.4) =10,800 (×£200)

=£2,160,000

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