R Ltd. is considering a project with the following Cash flows: in ₹ Years Cost of Plant Recurring Cost Savings 0 20,000 1 8,000 24,000 2 10,000…

Working Note : Year 1 Running Cost - 8,000 x 0.917 = (7, 336) Savings - 24,000 x 0.917 = 22,008 Year 2 Running Cost - 10,000 x 0.842 = (8, 420) Savings - 28,000 x 0.842 = 23,576 29,828 Year 0 Less: P.V. of Cash Outflow - 20,000 x 120,000 NPV - 9,828 (i) Sensitivity Analysis (by making NPV Zero) (1) Increase of Plant Value by - 9,828 ∴ (9,828 / 20,000) x 100 = 49.14% (2) Increase of Running Cost by - 9,828 (9,828 / (7336+8420)) x 100 = (9,828 / 15756) x 100 = 62.38% (3) Fall in Saving by - 9,828 = (9,828 / (22,008+23,576)) x 100 = (9,828 / 45,584) x 100 = 21.56% Hence, savings factor is the most sensitive to affect the acceptability of the project as in comparison of other two factors a slight % change in this fact shall more affect the NPV than others. (ii) Sensitivity Analysis if there is a variation of 10% in the factors. (1) If the initial project cost is varied adversely by say 10%. NPV (Revised) (₹ 9,828 - 2,000) = 7,828 Change in NPV = (9,828 -7,828) /9,828 = 20.35% (2) If Annual Running Cost is varied by say 10%. NPV (Revised) (₹ 9828 – 800X 0.917 – 1000X 0.842) = 9,828 - 733.60 - 842 = 8,252.40 Change in NPV = (9,828-8252.40) / 9,828 = 16.03% (3) If Saving is varied by say 10%. NPV (Revised) (₹ 9,828 – 2400X 0.917 – 2800X 0.842) = 9,828 - 2,200.80 - 2,357.60 = 5,269.60 Change in NPV (9828-5269.60) /9828 x 100% = 46.38% Hence, savings factor is the most sensitive to affect the acceptability of the project.