Determination of values price and volume, Financial Management

Assignment Help:

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%)(PVIFA8,5) - 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%) (PVIFA8,5) - 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.


Related Discussions:- Determination of values price and volume

Computing hedge ratio: the modified duration method, Let us consider a situ...

Let us consider a situation wherein a position in an interest rate dependent asset such as a bond portfolio or a money market security is hedged by using an interest ra

Explain the purchasing power parity, Explain the purchasing power parity, b...

Explain the purchasing power parity, both of the absolute and relative versions. What causes the deviations from the purchasing power parity? Answer:  The absolute version of p

Examine the concepts related to financial management, Assume you are a prof...

Assume you are a professional financial analyst working for a wealthy investor.  Your client has $2.6 million to invest and wants to sink it into a single stock (diversification is

How to calculate cost of capital?, To calculate the Cost of Capital, we wil...

To calculate the Cost of Capital, we will use the Weighted Average Cost of Capital (WACC) formula             WACC = (E/V) X R E + (D/V) X R D X (1 - T C ) where

Structure and participation of hedge funds, Structure and Participation of ...

Structure and Participation of Hedge Funds: The typical structure for a Hedge Fund is to facilitate the tax concerns of investors and fund managers. Basically, there are two or

How to solve problems, I need help solving problems for learning financial ...

I need help solving problems for learning financial management?

Routine functions, Routine functions For the efficient execution of the...

Routine functions For the efficient execution of the managerial finance functions, routine functions have to be executed. Such decisions concern procedures and systems and incl

State the rate of return of a bond - debt securities, Rate of return of a B...

Rate of return of a Bond In case of bonds, rather than dividends, investor is entitled to payments of interest yearly or semi-annually. Investor also benefits if there is an ap

Calculate the net present value of a purchase of earthmover, Your construct...

Your construction company is evaluating the proposed acquisition of a new earthmover. A consulting company you hired developed the following analysis last year at a cost to you of

What is deposit method, Q. What is Deposit Method? Deposit Method - Rel...

Q. What is Deposit Method? Deposit Method - Related to sales of real estate, under this method seller doesn't recognize any profits, doesn't record a note RECEIVABLE and contin

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd