Sensitivity Analysis.

United Refineries limited is considering investing in an Oil refining machine which has an estimated life of 15years. The equipment will be purchased locally from Mine Machines at a price of USD$ 150 000.00. The oil refining machine has the capacity of refining 15 000litres per annum. The contribution per Litre is expected to be USD$ 2.75. Specific Fixed costs are estimated to be USD$18 000 per year and United refineries has a Cost of capital of 15%.

REQUIRED Marks

(a) (b)

(c) (d)

Calculate the NPV of the project.

Calculate the sensitivity of your NPV to the:

(i) initial investment;

(ii) annual contribution;

(iii) annual fixed costs.

Draw a diagram to illustrate the sensitivity of the project to the annual demand. i.e. an NPV to annual demand graph.

Use your diagram to identify the minimum annual sales required to ensure that the project at least breaks even.