212 Corporate Finance
- Project life = 10 years.
- Number of units sold in lac (No.).
Years 20" 14"
1 1.5 2.7
2 1.875 3.375
3 2.5 4.5- Average EBIT as percentage of revenues = 10.5 percent.
With this set of assumptions, the NPV for the base case is Rs 124 lac. We shall determine the sensitivity
of NPV and IRR to changes in selling price—keeping other variables constant.
Selling price for a 20" tube = Rs 475
Selling price for a 14" tube = Rs 300The revenues and cash flows are shown here:(Rs lac)
Years Revenue Cash flow
1 1,522.5 –112.45
2 1,903.12 –48
3 2,537,050 233.5
4 2,537,050 185
5 2,537,050 176.5
6 2,537,050 167.5
7 2,537,050 156
8 2,537,050 145
9 2,537,050 132
10 2,537,050 916Initial investment = Rs 1410 lac
NPV = –Rs 754.60 lacWhen the price decreases by 5 percent for a 20" tube, and by 7.7 percent for a 14" tube, then the NPV
decreases to –Rs 754.60 lac. The change in NPV for changes in selling price could be calculated for the
likely range as shown here; N 1 being the NPV when prices are Rs 475 and 300 respectively and N 2 being the
NPV when prices are Rs 490 and 315—and so on.
(Rs lac)Selling Price NPV
*475,300 N 1
490,315 N 2
500,325 N 3
525,350 N 4
550,375 N 5
- for 20" and 24" picture tubes respectively