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CMA Final · Strategic Financial Management · Evaluation of Risky Proposals for Investment Decisions

A project has an initial outlay of Rs 5,00,000 and yields annual cash inflows of Rs 1,50,000 for 5 years. Cost of capital is 10% and the 5-year annuity factor is 3.791. By what percentage can the annual cash inflow fall before the NPV becomes zero (sensitivity to cash inflow)?

The annual inflow can fall by about 12.1% before NPV turns zero. Present value of inflows is Rs 5,68,650 against an outlay of Rs 5,00,000, giving NPV of Rs 68,650. Dividing NPV by the present value of inflows gives the sensitivity margin of roughly 12.1%.

  1. A12.1%
  2. B13.2%Correct
  3. C8.7%
  4. D20.0%

Explanation

PV of inflows = 1,50,000 x 3.791 = 5,68,650; NPV = 68,650. Percentage fall = 68,650 / 5,68,650 = 12.07%, i.e. about 12.1%.

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