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
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:
Variable costs 311,200
Fixed cost 30,000
Depreciation 15,000 356,200
Add back depreciation 15,000
Net cashflows 24,400
NPV = 24,400 x 6.145 - 150,000
Note: The NPV is not equal to zero due to rounding off effects.