BUSF_A01.qxd

Suggested answers to selected problem questions

where Dis annual demand (in units), Sis the selling price per unit, Vis the variable

cost per unit, Anris the annuity factor at rate rover nyears and Iis the initial investment.

Thus:

NPV =[2,000(4 −1)2.673] −15,000 =£1,038

Since the NPV is a significant positive figure the machine should be acquired.

(b) Sensitivity analysis

(i) Annual demand

This requires setting NPV at zero, putting in all inputs except annual demand, and

solving for annual demand. That is:

[D(4 −1)2.673] −15,000 = 0

D==1,871 units

(ii) Selling price per unit

2,000(S−1)2.673 =15,000

S =+ 1 =£3.806

(iii)Variable cost per unit

2,000(4 −V)2.673 =15,000

V=+ 4 =£1.194

(iv)Discount rate

2,000(4 −1)A 3 r=15,000

A 3 r==2.500

Looking at the annuity table for the 3 years row, 2.5 lies between 9 per cent and 10 per

cent, nearer to 10 per cent, so say 10 per cent.

(v) Life (in years) of the project

An^6 =2.500 (from (iv) above)

Looking down the 6 per cent column in the annuity table, 2.5 lies between 2 and

3 years, nearer to 3 years, so say 3 years.

(vi)Initial investment

I=2,000(4 −1)2.673

=£16,038

15,000

6,000

−15,000

2,000 ×2.673

15,000

2,000 ×2.673

15,000

3 ×2.673

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