**Question 1 (20 marks)**

Windhoek Bakeries has identified a niche market in which they would sell a special type of bread to high

schools in Namibia. Since this is a special type of bread that is not being manufactured currently,

Windhoek Bakeries expects that they will be in business for two years before competitors enter the

market. As such they have planned for this two year horizon after which they will review their business

plan. The initial baking equipment required to facilitate this project will cost Windhoek Bakeries

N$7 000 000. They expect to generate a revenue of N$6 500 000 in each of the two years with at a

selling price of $10 per unit. The total variable costs for the bakery are expected to be N$2 000 000 for

each of the two years. The required rate of return on similar projects is 8%.

**Requirement:**

What is the sensitivity of this project to changes in:

i) initial investment

ii) sales volume

iii) selling price

iv) variable cost per unit

v) cost of capital. (15

marks)

vi) Explain the meaning of sensitivity analysis and determine to which variable the project is

more sensitive to? (5 marks

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