Sensitivity Analysis for Changes in Quantity by 10%


Added on  2019-09-25

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Sensitivity Analysis for Changes in Quantity by 10%_1

INTRODUCTIONBooli Electronics a manufacturer of electronic products is currently producing a product smartspeaker and home assistant (SSHA). With the change in technology Booli Electronics isconsidering producing a new SSHA model which has Wi-Fi tethering and access to large numberof streaming services, in addition to all the features of the old model. This report shows whetherthe new SSHA should be produced or not and why.THE BODYBooli Electronics had already spent $ 1,175,000 developing a prototype and $ 650,000 for themarket study. Now the Booli Electronics wants to decide whether it should produce the newmodel of SSHA or not. As the Net Present Value of producing the new model for 5 years is positive and that too $39,608,542 (Appendix-6) the company should go for production of new model. Company’srequired rate of return is 12% while new model of SSHA will provide 38.32% of return to thecompany. (Appendix-5) The company should try to increase its market share by launching newmodel.We can also see that the profitability index of the capital investment decision is 1.84 (Appendix-3) which is very good. Also the payback period of the project is only 2.09 years (Appendix-2)means Booli Electronics will get its money back in around 2 years only. Net Present Value of the project is very sensitive to price of the product. If price of the productchanges unfavorably by 10% then the net present value will decrease by 44.47 % (Appendix-6)which is very high. Thu company should set the pricing of the product very wisely.
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Also, if we check the sensitivity of the net present value of the project with the quantity sold ofthe model, then we find that if sale quantity of the new model decreases by 10 % then the netpresent value will decrease by 23%. (Appendix-7) Thus company should keep its customersintact and should try to maintain handsome amount of demand of its new model of SSHA.In case Booli electronics will lose sale of other models on introduction of new model of SSHA,then first we will see whether the cash flows lost from that sales are less than the cash flows fromthe new model. If the net inflow, after deducting cash inflows of old model from the existingmodels is positive then Booli should go for new model.CONCLUSIONSince Booli will make handsome amount of profits after introduction of new SSHA model, I willrecommend that Booli should go for new SSHA model at the earliest.RECOMMENDATIONSIt is recommended that Booli should conduct a study of price elasticity of demand for the newSSHA model and then should charge such price that will give demand of enough units whichwill give highest sales in volume to Booli Electronics.
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