Q7: Sensitivity analysis (Decision reversal) (15 pts) You have to evaluate two p

Question

Q7: Sensitivity analysis (Decision reversal) (15 pts) You have to evaluate two projects with the data given below. Your MARR-8% and the study period is 10 years. Capital Investment Annual overhead cost (Fixed cost) Unit sales price (Pu Unit production cost (cu) (Variable cost) Annual sales volume 10.000$ 15.000$ 2.000S/vr 3.000/vr 5,00S/u 5,00S/u 2,50$/u 2,00$/u 2.000 u/yr 2.000/yr Show which project is prefered using PW method. Find the annual sales volume for decision reversal point. (The sales volume required to switch your decision) a. b.

Explanation / Answer

a. Given MARR = 8% and study period = 10 years

Here annual sales volume for both projects = 2,000 u/yr and also unit sales price for both projects = $500/u

Therefore, annual sales revenue for both the projects = 2000*500= $1000,000

Also total annual cost of the project 1 = fixed cost +variable cost = 2000+2000*250 = $502000

and total annual cost of the project 2 = 3000+2000*200 = $403000

Present worth of project 1 = $10000(P/A, 8%,10)- $502000 + $1000,000 = $10000*5.747-$502000+$1000,000 = $555470

Present worth of project 2 = $15000(P/A,8%,10)-$403000+$1000,000 = $15000*5.747-$403000 +$1000,000 =$683205

From the above calculation, it is clear that present worth or PW of project 2 is higher than project1. Therefore, project 2 is preferred.

b.   Present worth of project 2- present worth of project 1 = $683205-$555470= $127735 which is sales revenue that project 1 must achieve for decision reversal point.

Unit sales price of project 1 = $500/u

The excess annual sales volume of project 1 = $127735/500= 256 ( Rounded to next digit)

Therefore, annual sales volume of project 1 = 2000+256 = 2256 u/yr

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.