CMA Final · Strategic Financial Management · Evaluation of Risky Proposals for Investment Decisions
A project of Arjun Auto has a base-case NPV of Rs 12 lakh. The present value of annual sales-linked inflows is Rs 80 lakh. Management wants to know by what percentage the PV of these inflows can fall before the NPV becomes zero, all else constant. What is the sensitivity margin?
The PV of inflows can fall by 15% before NPV reaches zero. NPV of Rs 12 lakh is the cushion, and dividing it by the Rs 80 lakh present value of inflows gives 15%.
- A12%
- B15%Correct
- C8%
- D18.75%
Explanation
NPV becomes zero when PV of inflows falls by Rs 12 lakh. Percentage = 12/80 = 15%. Using 12/(80-12)=17.6% would wrongly use the outlay-based base.
Did you get it right without looking?
One question tells you little. A timed set on Evaluation of Risky Proposals for Investment Decisions shows your real accuracy, how long you take and where you lose marks.
More Evaluation of Risky Proposals for Investment Decisions questions
- Ganga Polymers is considering a project with an initial cost of Rs 6,00,000 and an annual cash inflow of Rs 2,40,000 for 4 years. Using a ri…
- Shree Plastics has a project with initial outlay Rs 1,00,000 and cash flows in year 1 and year 2 as follows. Year 1: Rs 60,000 (probability …
- 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-y…
- Meera Plastics is assessing a project with an initial outlay of ₹10,00,000 and a uniform annual inflow of ₹3,50,000. The present value annui…
- A project of Kaveri Engineering has an initial outlay of Rs 1,00,000 and a single cash inflow at the end of year 1 with the following probab…
- For a project, the expected NPV is Rs 40,000 and the standard deviation of NPV is Rs 20,000. Assuming NPV is normally distributed, what is t…