Conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables’values at 10% and 20% above and below their base-case values.

Fin – case (11-18) – build a model: issues in capital budgeting

The sensitivity analysis can be used to determine the effect of changing input variables on an outcome, such as Net Present Valu (NPV). This case will show how the variable costs per unit, sales price and quantity of units sold can affect the NPV. These inputs have base values of $100, $60 and 5000 respectively.

The sensitivity analysis is performed by taking each variable independently and setting its value 10% above and below its base-case value ($90 – $110 for sales price; $54 – 66 for variable cost; 4500 – 5500 for number of units sold) to determine how the NPV would change with different values. This allows you to determine which variables have the largest influence on the NPV, so that the right actions can be taken.

Because they each play an important part in the determination of NPV, a 10% change or increase in one of them will result in significant changes in it. Variable cost rises by 25% when the variable costs are increased by 10%. Sales price increases by 10% cause a decrease of 25% in NPV. However, if variable cost is increasing by 10% there is a 25% drop in NPV. Similar to the above, an increase of 10% in units sold leads to about 30% more NPV.

Overall this exercise demonstrates that even small changes can have major impacts on outcomes such as Net Present Value & hence should be taken into account before making any decisions about future marketing strategies or pricing policies.

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