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YHJ is considering an investment in a project that will cost $20 million. Annual fixed costs will be $12 million per year, excluding depreciation. Annual sales are forecast at 5 million units, with a contribution per unit of $8. After five years the equipment will be worn out and YHJ will have to spend $50 million on disposal costs. The discount rate is 10%.
Calculate the sensitivity of the net present value of this project to a 20% increase in the disposal costs.
Suggested Answer: A, B, D
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31 comments · newest first
DE
Devora
12 months ago
Wait, $50 million for disposal? That's insane!
TY
Ty
12 months ago
I disagree, the NPV should still be positive.
AM
Amie
1 year ago
20% increase in disposal costs? That sounds risky!
LE
Lemuel
1 year ago
I think the disposal costs are a huge factor here.
ZA
Zana
1 year ago
The initial investment is $20 million.
GO
Goldie
1 year ago
I feel like the answer might be around 20% since the disposal costs are a significant part of the project, but I really need to double-check my calculations.
LU
Lucy
1 year ago
I’m a bit confused about how to apply the discount rate here. Do we need to discount the increased disposal costs separately?
JE
Jesusita
1 year ago
I think the key is to first calculate the NPV without the increase and then see how much it changes with the 20% increase in disposal costs.
VE
Veta
1 year ago
I remember we did a similar question on NPV sensitivity in class, but I’m not sure how to factor in the increase in disposal costs correctly.
VA
Vannessa
1 year ago
I'm a bit confused by the GROUP BY clauses in some of these queries. I'll need to review the rules around using aggregate functions and grouping.
LA
Latia
1 year ago
I'm a bit confused by the wording here. Does "forms its own cluster" mean the KV store is a separate entity from the SHC? Or is it part of the SHC? I'll need to re-read the question carefully.
ED
Edna
1 year ago
I'm just hoping I don't have to do any origami with the financial statements to solve this one.
VA
Val
1 year ago
C) 31%
EL
Elvera
1 year ago
B) 13%
SH
Shawana
1 year ago
A) 11%
LO
Loreen
1 year ago
Wait, did they say the equipment will be worn out after five years? That's rough, I wonder if there's a way to extend the project's lifespan.
CE
Celestine
1 year ago
This question is making my head spin. I wish they had given us a calculator or something to make the math a little easier.
AL
Alyce
1 year ago
The sensitivity of the net present value to a 20% increase in disposal costs is 31%, so option C.
CA
Catalina
1 year ago
I agree, let's try to work through it step by step.
DE
Derick
1 year ago
That would be great, thank you!
PI
Pilar
1 year ago
I think the answer might be C) 31%.
VI
Victor
1 year ago
I know, this question is really challenging without a calculator.
DE
Dean
1 year ago
Don't worry, I can help you with the calculations.
LA
Lai
1 year ago
I bet the correct answer is C) 31%. That seems like the most significant sensitivity to the disposal costs.
RA
Raul
2 years ago
Alright, let's break this down step-by-step. The disposal costs are a significant factor, so a 20% increase could really impact the project's viability.
TO
Tori
2 years ago
Hmm, this seems like a tricky one. I'll need to carefully calculate the NPV and its sensitivity to the disposal costs.
VA
Van
1 year ago
User 2
CA
Carma
1 year ago
User 1
JU
Justine
2 years ago
But if disposal costs increase by 20%, it will have a significant impact on the net present value of the project.
DE
Devorah
2 years ago
I disagree, I believe the answer is B) 13%.
JU
Justine
2 years ago
I think the answer is C) 31%.