Q7 Sensitivity analysis Decision reversal 15 pts You have to

Q7: Sensitivity analysis (Decision reversal) (15 pts) You have to evaluate two projects with the data given below. Your MARR-8% and the study period is 10 years. Capital Investment Annual overhead cost (Fixed cost) Unit sales price (Pu Unit production cost (cu) (Variable cost) Annual sales volume 10.000$ 15.000$ 2.000S/vr 3.000/vr 5,00S/u 5,00S/u 2,50$/u 2,00$/u 2.000 u/yr 2.000/yr Show which project is prefered using PW method. Find the annual sales volume for decision reversal point. (The sales volume required to switch your decision) a. b.

Solution

a. Given MARR = 8% and study period = 10 years

Here annual sales volume for both projects = 2,000 u/yr and also unit sales price for both projects = $500/u

Therefore, annual sales revenue for both the projects = 2000*500= $1000,000

Also total annual cost of the project 1 = fixed cost +variable cost = 2000+2000*250 = $502000

and total annual cost of the project 2 = 3000+2000*200 = $403000

Present worth of project 1 = $10000(P/A, 8%,10)- $502000 + $1000,000 = $10000*5.747-$502000+$1000,000 = $555470

Present worth of project 2 = $15000(P/A,8%,10)-$403000+$1000,000 = $15000*5.747-$403000 +$1000,000 =$683205

From the above calculation, it is clear that present worth or PW of project 2 is higher than project1. Therefore, project 2 is preferred.

b.   Present worth of project 2- present worth of project 1 = $683205-$555470= $127735 which is sales revenue that project 1 must achieve for decision reversal point.

Unit sales price of project 1 = $500/u

The excess annual sales volume of project 1 = $127735/500= 256 ( Rounded to next digit)

Therefore, annual sales volume of project 1 = 2000+256 = 2256 u/yr