Acceptability Analysis of a new SSHA by Boo

BUSINESS FINANCE BUSINESS FINANCE 7 Business finance Name of the student Name of the university Student ID Author note Introduction 2 Answer 1 2 Answer 2 Answer 3 2 Answer 4 3 Answer 5 3 Answer 6 5 Answer 7 7 Conclusions 7 Answer 8 7 Recommendations 7 Reference 8 Introduction The main objective of the report is to analyse the acceptability of the project that is new SSHA by Booli Electronics. Answer 4 Net present value (NPV) NPV presents the expected cash flows from any project and

Running head: BUSINESS FINANCE
Business finance
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Introduction................................................................................................................................2
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................2
Answer 3....................................................................................................................................2
Answer 4....................................................................................................................................3
Answer 5....................................................................................................................................3
Answer 6....................................................................................................................................5
Answer 7....................................................................................................................................7
Conclusions................................................................................................................................7
Answer 8....................................................................................................................................7
Recommendations......................................................................................................................7
Reference....................................................................................................................................8

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Introduction
The main objective of the report is to analyse the acceptability of the project that is
new SSHA by Booli Electronics. The acceptability will be evaluated through computing the
payback period, profitability index, internal rate of return and net present value of the project.
Further, the report will analyse the sensitivity of net present value with respect to changes in
sales price and changes in sales quantity.
Answer 1
Non-discounted payback period
This method is used under capital budgeting to measure the payback period of any
project. However, the main disadvantage of the method is that is does not takes into
consideration the time value of money factor and further ignores the amount receivable after
payback period (Baucells and Borgonovo 2013). As per the calculation the non-discounted
payback period of ne SSHA project is 2.21 years.
Answer 2
Profitability index (PI)
This index identifies the correlation among the costs and benefits of proposed project
(Pasqual, Padilla and Jadotte 2013). The calculated profitability index for new SSHA project
is 1.72.
Answer 3
Internal rate of return (IRR)

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IRR is the rate of interest at which the cash inflows of the projects equals to the cash
outflows of the project. In other words the net cash flow becomes zero. As per the calculation
the IRR of new SSHA project is 20.75%.
Answer 4
Net present value (NPV)
NPV presents the expected cash flows from any project and while computing the
expected cash inflows the initial cash outflows are deducted from it to analyse the project’s
acceptability (Leung et al. 2014). Project is accepted if the NPV is positive and not accepted
where the NPV is negative. NPV of new SSHA project is $ 32,544,049.64.
Answer 5
Sensitivity analysis with regard to changes in sales price
Economic and financial analysis for cost-benefit of any project is depended upon the
forecasting of quantifiable variables. The values of those variables are projected on the basis
of most expected factors like changes in the sales price or changes in the sales volume or
quantity (McAuliffe 2015). These are influenced by large number of factors and actual value
can significantly vary from the expected values. Therefore, it is important to take into
consideration the impact of expected changes with regard to the key variables. Sensitivity
analysis mainly focuses on the evaluation of impacts likely to take place due to the variables
on the NPV of the project that is used for measuring the viability of the project (Butler et al.
2014).
Sensitivity analysis is the method of analysing the effect of changes in the project
variables on the most expected case. Generally the unfavourable changes are taken into

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consideration under the sensitivity analysis. Main objectives of sensitivity analysis are as
follows –
 It is used to recognize the likely impacts of unfavourable changes under the key
variables.
 It recognizes the key variables that has an influence on the benefit and cost streams of
the project
 It recognizes the actions that can be taken to eliminate the expected unfavourable
impact on the project
 To analyse whether the decisions will have an impact on the changes
Price NPV
$ 325,44,049.64
500 $ (114,80,321.15)
515 $ (79,10,777.57)
530 $ (43,41,233.99)
545 $ (7,71,690.42)
560 $ 27,97,853.16
575 $ 63,67,396.74
590 $ 99,36,940.31
605 $ 135,06,483.89
620 $ 170,76,027.47
635 $ 206,45,571.05
650 $ 242,15,114.62
665 $ 277,84,658.20
680 $ 313,54,201.78
695 $ 349,23,745.35
710 $ 384,93,288.93
725 $ 420,62,832.51
740 $ 456,32,376.08
755 $ 492,01,919.66
770 $ 527,71,463.24
785 $ 563,41,006.81
800 $ 599,10,550.39
815 $ 634,80,093.97
830 $ 670,49,637.55
845 $ 706,19,181.12
860 $ 741,88,724.70
875 $ 777,58,268.28
890 $ 813,27,811.85
905 $ 848,97,355.43

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450 500 550 600 650 700 750 800 850 900 950
$(20,000,000.00)
$-
$20,000,000.00
$40,000,000.00
$60,000,000.00
$80,000,000.00
$100,000,000.00
Selling price
N
P
V
It can be observed from the above table and graph that the NPV of the project
increases with the increase in the selling price. For the selling price ranged from $ 500 per
unit to $ 905 per unit the NPV is ranged from - $ 114,80,321.15 to $ 848,97,355.43.
Therefore, for every $ 15 changes in selling prices the NPV increases by $ 35,69, 543.58.
Therefore, the NPV varies directly with the change in selling prices and the NPV is highly
sensitive to changes in the sales price.
Answer 6
Sensitivity analysis with regard to changes in sales quantity
It is performed to analyse the changes in NPV with the changes in sales quantity.
However the sensitivity analysis shall be recognized in systematic way (Leyman and
Vanhoucke 2016). For meeting the objectives of sensitivity analysis the below mentioned
steps must be followed –
 Recognizing the key variables with regard to which the decision related to project can
be sensitive
 Measuring the likely impact of the variables in base case of NPV and calculating the
indicator of sensitivity or switching the value, if required (Iooss and Lemaître 2015)

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 Taking into consideration the combination of the variables that may lead to
unfavourable direction
 Analysing direction and scale for expected changes with regard to the recognized key
variables that involves recognition of the sources for changes.
Sales volume Amount
$ 325,44,049.64
25000 $ 259,49,461.64
45000 $ 281,47,657.64
65000 $ 303,45,853.64
85000 $ 325,44,049.64
105000 $ 347,42,245.64
125000 $ 369,40,441.64
145000 $ 391,38,637.64
165000 $ 413,36,833.64
185000 $ 435,35,029.64
205000 $ 457,33,225.64
225000 $ 479,31,421.64
245000 $ 501,29,617.64
265000 $ 523,27,813.64
285000 $ 545,26,009.64
0 50000 100000 150000 200000 250000 300000
$-
$10,000,000.00
$20,000,000.00
$30,000,000.00
$40,000,000.00
$50,000,000.00
$60,000,000.00
Sales volume
N
P
V
It can be observed from the above table and graph that the NPV of the project
increases with the increase in the selling quantity. For the selling quantity ranged from 25000
units to $ 285,000 unit the NPV is ranged from $ 259,49,461.64 to $ 545,26,009.64.

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Therefore, for every 20,000 unit changes in selling quantity the NPV increases by $
21,98,196. The sensitivity will be regarded as positive if there is positive correlation between
the quantity and NPV. It means to say that the positive changes in quantity increase the NPV
and negative changes in quantity reduce the NPV. Therefore, the NPV of new SSHA varies
directly with the change in selling quantity and the NPV is highly sensitive to changes in the
sales quantity.
Answer 7
Conclusions
Production of SSHA
Production of new SSHA will be depended on the cash inflows and cash outflows
from the project. If the expected present value of the cash inflows from production of new
SSHA is positive then the company shall go for the production otherwise not (Gallo 2014). It
is identified from the calculation that the NPV of the project for new SSHA comes to $
32,544,049.64. it is signifying that the present values of cash inflows of the project is more
than the cash outflows required for the project. Therefore the company shall produce ne
SSHA.
Answer 8
Recommendations
If the company loses sales on other model owing to the production of new SSHA, the
losses amount shall be added up with the initial cash outflows of the ne SSHA project. If
inclusion of loss from other model lead to negative NPV from the new SSHA project then the

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company shall not produce ne SSHA. On the contrary is the NPV still comes positive then
the company shall produce new SSHA

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Reference
Baucells, M. and Borgonovo, E., 2013. Invariant probabilistic sensitivity
analysis. Management Science, 59(11), pp.2536-2549.
Butler, M.P., Reed, P.M., Fisher-Vanden, K., Keller, K. and Wagener, T., 2014. Identifying
parametric controls and dependencies in integrated assessment models using global
sensitivity analysis. Environmental modelling & software, 59, pp.10-29.
Gallo, A., 2014. A refresher on net present value. Harvard Business Review, 19.
Iooss, B. and Lemaître, P., 2015. A review on global sensitivity analysis methods.
In Uncertainty management in simulation-optimization of complex systems (pp. 101-122).
Springer, Boston, MA.
Leung, B., Springborn, M.R., Turner, J.A. and Brockerhoff, E.G., 2014. Pathway‐level risk
analysis: the net present value of an invasive species policy in the US. Frontiers in Ecology
and the Environment, 12(5), pp.273-279.
Leyman, P. and Vanhoucke, M., 2016. Payment models and net present value optimization
for resource-constrained project scheduling. Computers & Industrial Engineering, 91,
pp.139-153.
McAuliffe, R.E., 2015. Net Present Value. Wiley Encyclopedia of Management, pp.1-1.
Pasqual, J., Padilla, E. and Jadotte, E., 2013. Equivalence of different profitability criteria
with the net present value. International Journal of Production Economics, 142(1), pp.205-
210.

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