The Company is interested in the sensitivity analysis of key financials related to the dealership of electric bikes, ADVISE which among the three…

7 Calculation of NPV: ₹ (in crores) Calculation of Net Present Value (NPV) for the electric bike dealership Present Value of annual cash inflows (5 crores × 3.169 the PVIFA @ 10% cost of capital for 4 years) 15.845 Initial project cost (13) Net Present Value (NPV) 2.845 If the initial project cost is varied adversely by 10% Present Value of annual cash inflows 15.845 Revised estimate of initial project cost (13 crores ×110%) (14.3) Revised Net Present Value (NPV) 1.545 Change in NPV 1.3 Percentage change in NPV (₹ 2.845 crores – 1.3 crores)/ 2.845 crores 54.31% (Therefore, NPV changes adversely by 54.31% when initial project cost is varied adversely by 10%.) If annual cash inflow is varied adversely by 10% Revised annual cash inflow (5 crores × 90%) 4.5 Revised PV of annual cash inflows (4.5 crores × 3.169) 14.2605 Initial project cost (13) Revised Net Present Value (NPV) 1.2605 Percentage change in NPV (₹ 2.845 crores - 1.2605 crores)/2.845 55.69% (Therefore, NPV changes adversely by 55.69% when annual cash inflow is varied adversely by 10%.) If cost of capital is varied adversely by 10% Revised cost of capital (10% × 110%) 11.00% Revised PV of annual cash inflows (5 crores × 3.103) 14.2605 Initial project cost (13) Revised NPV of project with cost of capital 11% for 4 years 2.515 Percentage change in NPV (2.845 crores – 2.515 crores)/2.845 11.60% (Therefore, NPV changes adversely by 11.60%, when Cost of capital is varied adversely by 10%.) ADVISE As per the information given in the problem, the net present value of the dealership venture would be - 2.845 crores. If initial project cost is varied adversely by 10%, the cost increases from 13 crore to 14.30 crores. Accordingly, the NPV for the project would decrease from 2.845 crores to 1.545 crores. This is a decline by 54.31%. If the annual cash inflow is varied adversely by 10%, the cash inflow would reduce from 5 crores per annum to 4.5 crores per annum. Accordingly, the NPV for the project would decrease from 2.845 crores to 1.2605 crores. This is a decline by 55.69%. If the cost of capital is varied adversely by 10%, the cost of capital would increase from 10% to 11%. Accordingly, the NPV for the project would decrease from 2.845 crores to 2.515 crores. This is a decline by 11.60%. Therefore, it can be concluded from above the project is most sensitive to adverse impact on the annual cash inflow.