Alpha Holdings (Pvt) Ltd (AHL) is considering a medium-term investment project to construct an open-air entertainment park. This project needs an initial investment of Rs. 3 million and there will be no residual value at the end of its 3-year project lifespan. The computation performed by the business analyst of AHL shows a positive post-tax net present value (NPV) of Rs. 93,300 approximately for this project.

The following details were included in the computation performed by the business analyst.

Summary of pre-tax cash inflows and outflows

Year	Sales (Rs.)	Total cash outflows (Rs.)
1	6,000,000	4,500,000
2	7,500,000	5,500,000
3	6,300,000	4,300,000

The product pricing was done by adding a 50% mark-up on variable costs.

The company pays 25% corporate tax on the net operating cash flows. The entire tax is payable in the subsequent year. Capital allowances are not applicable for this investment.

AHL applies a post-tax cost of capital of 18% consistently for all project evaluations.

Calculate the sensitivity of the project NPV to changes in:

Variable costs

Cost of capital

Answer rating: 100% (QA)

The detailed answer for the above question is provided below i Variable costs Year ... View the full answer