A project requires an initial investment of $150. Your research generates the following estimates of revenues and costs: The cost of capital equals 10%.
| Pessimistic | Most Likely | Optimistic | |
| Revenues
Costs |
30
25 |
50
20 |
65
15 |
Assume that the cash flows occur in perpetuity. What does a sensitivity analysis of NPV (without taxes) show? (Answers appear in order: [Pessimistic, Most Likely, Optimistic].)
A) 50, -100, +400
B) -50, +300, +500
C) -100, +150, +350
D) +100, +150, +350
Answer : B) -50, +300, +500
Working notes for the above answer is as under
| Situation | Revenue | Cost |
| 1Pessimistic | 30 | 25 |
| Most Likely | 50 | 20 |
| Optimistic | 65 | 15 |
Now
cost of capital equals 10%.
so we will caluate it for perpturty
| Situation | Revenue | Cost |
| 1Pessimistic | 30/0.10 | 25/0.10 |
| Most Likely | 50/0.10 | 20/0.10 |
| Optimistic | 15/0.10 | 15/0.10 |
| Situation | Revenue | Cost | Answer | |
| 1Pessimistic | 300 | 250 | 300-250 | 50 |
| Most Likely | 500 | 200 | 500-200 | 300 |
| Optimistic | 650 | 150 | 650-150 | 500 |
