Determination of values

The values for which NPV turns into zero are found by calculating the break-even values for the selected variables. Once determined these give an indication of the sensitivity of the NPV to changes in these factors

(i) Price (P)

NPV = 0 = 0.15m [P- 13.50] (1 - 33%)(PVIFA_8,5) - 2m

Hence = 0 = [0.15mP-2.025] (2.675) - 2m

0 = 0.4P-5.42m-2m

0.4P = 7.42m

P = $18.55

This signifies price can drop by [$20 - $18.55]/$20 = 7% from the level assumed in the initial evaluation without making the NPV negative.

(ii) Volume (V)

Using a alike procedure

NPV = 0 = V[20 - 13.50] ( 1 - 33%) (PVIFA_8,5) - 2m

0 = V [17.39m]-2m

V = 2m/17.39m

= 115,000

This signifies volume can drop by [150,000 - 115,000]/150,000 = 23% from the level assumed in the initial evaluation without making the NPV negative.

The results propose that the NPV of the project is more sensitive to price variations than to changes in volume. Since price appears to be the more critical factor management might plan to engage in price support measures like advertising and promotional expenditure. It might as well attempt to obtain exclusive supply contracts with retailers although these could violate competition regulations. Measures such as these are probable to be costly in turn reducing the NPV of the project. It is probable that by making such adjustments other variables become more critical necessitating further analysis. At this phase we might infer that given the project has a positive NPV of $0.6m Burley could afford to engage in promotional activity with a present value slightly below this amount over the lifetime of the project.