Sensitivity Analysis Case:

Mr. Zuhaib Awan has recently graduated from Sukkur IBA. He has got
entrepreneurial mind and is keen to open up his new venture. he has prepared a
detailed Business Plan to attract the venture capitalists to invest in the business.
His idea is to produce computerized hair cut machine. He has already spent Rs.
500,000 to study market demand in the market and his results show that there is
great potential for this product in the industry. He has also been working with his
fellow partners including Mr. Mir Hassan perusing engineering and Mr. Abdul
Qayoom pursuing computer science degree in the same institution to develop
prototype of the product. They have spent Rs 800,000 to develop the prototype.
Their prototype is ready and is liked by different venture capitalists and their
customers.
To start production, they will need factory building which will cost Rs. 1,000,000.
They will also need machinery and the equipment of Rs 16,000,000 which will be
used to manufacture Computerized hair cut machine. The machine and
equipment will be imported from a promised supplier of China. The production
facility being installed has the useful life of 10 years.
After the rigorous study of economy, industry and target customers he has come
up with the demand forecast, price and variable cost per hair cut machine and
fixed cost as mentioned in the table below.
You have been hired as finance manager by Mr. Zuhaib and he has asked you to
Analyse the business opportunity and to see can this project yield positive future
prospects to the company. First, you are supposed to calculate NPV and IRR of
the project. Second, you are responsible to check the sensitivity of the business
to different variables like price, unit sold, fixed cost, and WACC.

Research and development Rs. 800,000

Cost
Plant building Rs. 1,000,000
Machinery and Equipment Rs. 16,000,000
Cost
Total Initial Investment Rs. 17,800,000

Deviation in Variables:

Variables Actual Deviation Deviation

(Positive) (Negative)
Deviation from Actual 0 25% -25%
Price per unit 40,000 50000 30000
Unit Sales per year 800 1000 600
Variable Cost 28000 35000 21000
Fixed Cost 1,546,000 1932500 1159500
Expected Life in years 10 10 10
Tax rates 30% 0.375 0.225
Depreciation per year 20% 20% 20%
Salvage Value 0 0 0
WACC 10% 12.50% 7.50%