Windhoek Bakeries has identified a niche market in which they would sell a special type of bread
Question:
Windhoek Bakeries has identified a niche market in which they would sell a special type of bread to high
schools in Namibia. Since this is a special type of bread that is not being manufactured currently,
Windhoek Bakeries expects that they will be in business for two years before competitors enter the
market. As such they have planned for this two year horizon after which they will review their business
plan. The initial baking equipment required to facilitate this project will cost Windhoek Bakeries
N$7 000 000. They expect to generate a revenue of N$6 500 000 in each of the two years with at a
selling price of $10 per unit. The total variable costs for the bakery are expected to be N$2 000 000 for
each of the two years. The required rate of return on similar projects is 8%.
Requirement:
What is the sensitivity of this project to changes in:
i) initial investment
ii) sales volume
iii) selling price
iv) variable cost per unit
v) cost of capital. (15
marks)
vi) Explain the meaning of sensitivity analysis and determine to which variable the project is
more sensitive to? (5 marks
Expert Answer:
To determine the sensitivity of the project to changes in different variables we need to calculate the impact of those changes on the projects net present value NPV Lets analyze each variable one by o... View the full answer
