X Ltd. is considering its new project with the following details: Sr. No. Particulars Figures 1. Initial capital cost 400 Cr. 2. Annual unit sales 5…

(i) Calculation of Net Cash Inflow per year Particulars Amount (₹) A Selling price per unit 100 B Variable cost per unit 50 C Contribution per unit (A - B) 50 D Number of units sold per year 5 Cr. E Total Contribution (C × D) 250 Cr. F Fixed cost per year 50 Cr. G Net cash inflow per year (E - F) 200 Cr. Calculation of Net Present Value (NPV) of the Project Year Year Cash Flow (in Cr.) PV factor @ 6% Present Value (PV) (in Cr.) 0 (400.00) 1.000 (400.00) 1 200.00 0.943 188.60 2 200.00 0.890 178.00 3 200.00 0.840 168.00 Net Present Value 134.60 Here, NPV represent the most likely outcomes and not the actual outcomes. The actual outcome can be lower or higher than the expected outcome. (ii) Sensitivity Analysis considering 2.5 % Adverse Variance in each variable Particulars Base Initial capital cost increased to 410 crore Selling Price per Unit Reduced to 97.5 Variable Cost Per Unit Increased to 51.25 Fixed Cost Per Unit Increased to 51.25 Units sold per year reduced to 4.875 crore (₹) (₹) (₹) (₹) (₹) (₹) A Selling price per unit 100 100 97.50 100 100 100 B Variable cost per unit 50 50 50 51.25 50 50 C Contribution per unit (A - B) 50 50 47.50 48.75 50 50 (in Cr.) (in Cr.) (in Cr.) (in Cr.) (in Cr.) (in Cr.) D Number of units sold per year (units in Crores) 5 5 5 5 5 4.875 E Total Contribution (C x D) 250 250 237.50 243.75 250 243.75 F Fixed cost per year 50 50 50 50 51.25 50 G Net Cash Inflow per year (E - F) 200 200 187.50 193.75 198.75 193.75 H PV of Net cash Inflow per year (G × 2.673) 534.60 534.60 501.19 517.89 531.26 517.89 I Initial capital cost 400 410 400 400 400 400 J NPV (H - I) 134.60 124.60 101.19 117.89 131.26 117.89 K Percentage Change in NPV -7.43% -24.82% -12.41% -2.48% -12.41% The above table shows that by changing one variable at a time by 2.5% (adverse) while keeping the others constant, the impact in percentage terms on the NPV of the project can be calculated. Thus, the change in selling price has the maximum effect on the NPV by 24.82%. Advantages of Sensitivity Analysis: Following are the main advantages of Sensitivity Analysis: (1) Critical Issues: This analysis identifies critical factors that impinge on a project's success or failure. (2) Simplicity: It is a simple technique. Disadvantage of Sensitivity Analysis Following are the main disadvantages of Sensitivity Analysis: (1) Assumption of Independence: This analysis assumes that all variables are independent i.e. they are not related to each other, which is unlikely in real life. (2) Ignore probability: This analysis does not look to the probability of changes in the variables.