CHAPTER 11
CONCH REPUBLIC ELECTRONICS,
PART 2
1. Here we want to examine the sensitivity of NPV to changes in the price of the new smart phone. The
calculations for sensitivity to changes in price are similar to the original cash flows. The only
difference is that we will change the price of the smart phone. We will use a price of $540 per unit,
but remember that the price we choose is irrelevant: The final answer we want, the sensitivity of
NPV to a one dollar change in price will be the same no matter what price we use. The projections
with the new prices are outlined below.
The sales figure for the first two years will be the sales of the new smart phone, minus the lost sales
of the existing smart phone, minus the lost dollar sales from the price reduction of the existing smart
phone, or:
Sales = New sales – Lost sales – Lost revenue
Sales Year 1 Year 2 Year 3 Year 4 Year 5
New $83,700,000 $89,100,000 $67,500,000 $51,300,000 $40,500,000
VC
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Sales $61,100,000 $71,600,000 $67,500,000 $51,300,000 $40,500,000
VC 29,750,000 31,950,000 27,500,000 20,900,000 16,500,000
NWC
Beg $0 $12,220,000 $14,320,000 $13,500,000 $10,260,000
So, the cash flows of the project under this price assumption are:
Time Cash Flow
0 –$43,500,000
1 8,795,892
The NPV with this sales price is:
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And the sensitivity of changes in the NPV to changes in the price is:
2. Here we want to examine the sensitivity of NPV to changes in the quantity sold. The calculations for
sensitivity to changes in quantity are similar to the original cash flows. The only difference is that we
The sales figure for the first two years will be the sales of the new smart phone, minus the lost sales
of the existing smart phone, minus the lost dollar sales from the price reduction of the existing smart
phone, or:
Sales = New sales – Lost sales – Lost revenue
Note, the variable costs must also be increased to account for the additional units sold.
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Sales Year 1 Year 2 Year 3 Year 4 Year 5
VC
Sales $60,378,500 $70,828,500 $66,928,500 $50,878,500 $40,178,500
VC 29,772,000 31,972,000 27,522,000 20,922,000 16,522,000
Fixed costs 6,400,000 6,400,000 6,400,000 6,400,000 6,400,000
NWC
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So, the cash flows of the project under this quantity assumption are:
Time Cash Flow
0 –$43,500,000
1 8,352,827
The NPV under this assumption is:
So, the sensitivity of NPV to units sold is:
For a one unit per year change in quantity sold of the new smart phone, the NPV of the project
changes $862.23 in the same direction.
CHAPTER 25 C-6