## BREAK-EVEN ANALYSIS

Sensitivity analysis is a variation of the break-even analysis. In sensitivity analysis we are asking; for example, what shall be the consequences if volume or price or cost changes? This question can be asked differently: How much lower the sales volume can become before the project becomes unprofitable? To answer this question we shall require the Breakeven point.

Continuing with the above example, let us compute the level of units variable costs above which the NPV is negative.

NPV = Annual cashflows x PVIFA 10%, 10 yrs - 150,000

But

Annual cashflows = Revenue - variable costs - Fixed costs - depreciation - Tax + depreciation.

Let variable cost per unit be V

Annual cashflows = (375,000 - 100 (V) - 45,000)0.5 + 15,000

Therefore NPV = [(330,000 - 100 V) 0.5 + 15,000] x 6.145 - 150,000

At Break even point NPV = 0

Therefore (165,000 - 50 V + 15,000) 6.145 = 150,000

1,106,100 - 307.25v = 150,000

307.25 V = 956,100

V = 3,111.8

Therefore the point above which the variable cost per unit will cause the NPV to be negative is about Sh 3,112.

To prove if variable unit cost is Sh 3,112 the NPV will be computed as follows:

Sh

Revenue 375,000

Variable costs 311,200

Fixed cost 30,000

Depreciation 15,000 356,200

18,800

Tax 9,400

9,400