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

Mahesh Auto Ltd is considering a project with an outlay of Rs 1,00,000. Annual cash inflow for 2 years is Rs 70,000 at a discount rate of 10%. Sensitivity analysis is performed on the annual cash inflow. By what percentage can the annual inflow fall before NPV becomes zero? (Annuity factor 2 years at 10% = 1.7355.)

The annual inflow can fall by about 17.7% before NPV reaches zero. The break-even inflow is the outlay of 1,00,000 divided by the annuity factor 1.7355, which is roughly 57,620, against the base of 70,000. The decline is about 12,380, or 17.7% of the base.

  1. AApproximately 17.7%Correct
  2. BApproximately 21.4%
  3. CApproximately 14.3%
  4. DApproximately 22.9%

Explanation

Present value of base inflows = 70,000 x 1.7355 = 1,21,485; NPV = 21,485. Break-even inflow = 1,00,000/1.7355 = 57,620. Fall = (70,000 - 57,620)/70,000 = 17.69%, about 17.7%. The 21,485 / 1,21,485 = 17.7% check agrees.

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