Question

Please round the numbers to 3 decimal places

Problem 9-20 Sensitivity Analysis [LO 3] We are evaluating a project that costs $2,130,000, has a 8-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project Sales are projected at 90,600 units per year. Price per unit is $38.85, variable cost per unit is $23.95, and fixed costs are $860,000 per year. The tax rate is 25 percent, and we require a return of 11 percent on this project. 14.28 points eBook References a. Calculate the base-case operating cash flow and NPV. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g.. 32.16.) b. What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g. 32.161.) c. If there is a 450-unit decrease in projected sales, how much would the NPV change? (A negative answer should be indicated by a minus sign. Do not round Intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) d. What is the sensitivity of OCF to changes in the variable cost figure? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e... 32.) e. If there is a $1 decrease in estimated variable costs, how much would the OCF change? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a. Base-case operating cash flow Base-case NPV b. NPV sensitivity c. NPV change d. OCF sensitivity e. OCF change

Answer 1

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- 2x Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11 A A = = = V Wrap Text General Ea Copy Paste BI U D- DA Format Painter Merge & Center - $ % , Conditional Format :.: Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells E361 А в B C D E F 1 361 362 depreciation = 2130000/8 = 266250.00 363 364 a OCF =( (sp-vc)(units) - fixed cost)(1-t) + t(depreciation) 365 OCF =( (38.85-23.95)(90600) - 860000)(1-0.25) + (0.25)*(266250) OCF = 434017.5 base cash flow L M 366 367 368 369 370 371 NPV = NPV = NPV = NPV = Present value of all cash flows - investment (434017.50 x PVIFA @11%,8 years) - 2130000 (434017.50 x 5.146123) - 2130000 103507.34 PVIFA @ 11%, 8 YEARS (1/r)*(1-(1/(1+r)^n)) (1/0.11)*(1-(1/(1+0.11)^8)) 5.146123 372 373 b To calculate sensitivity, we have to take one more sales units let us take sales units = 90500 374 375 376 377 378 379 HAN Red OCF =( (sp-vc)(units) - fixed cost)(1-t) + t(depreciation) OCF =( (38.85-23.95)(90500) - 860000)(1-0.25) + (0.25)*(266250) OCF = 432900 BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE NPV RELEVANT ferences SENSITIVITY Sheet1 I BOU 130% -_ 0 ODOB 9 * ENG 08-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Calibri A = = = V General 11 A D- DA Wrap Text Merge & Center - BI U $ % , :.: E Copy Paste Format Painter Clipboard E372 Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Font Alignment Number Cells A B DE L M To calculate sensitivity, we have to take one more sales units let us take sales units = 90500 372 373 b 374 375 376 377 378 379 380 OCF =( (sp-vc)(units) - fixed cost)(1-t) +t(depreciation) OCF =( (38.85-23.95)(90500) - 860000)(1-0.25) + (0.25)*(266250) OCF = 432900 381 NPV = NPV = NPV = NPV = Present value of all cash flows - investment (432900 x PVIFA @11%,8 years) - 2130000 (432900 x 5.146123) - 2130000 97756.54 382 383 384 The sensitivity of NPV to changes in units -change in NPV/change in units The sensitivity of NPV to changes in units =(97756.54 -103507.34)/(90500-90600) = 57.508 385 386 ANSWER 387 388 C IF SALES DROP BY 450 UNITS THEN NPV WILL DECREASE change in NPV = -25878.56 [57.508 x 450] 389 390 HAN Red NPV RELEVANT ferences BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE SENSITIVITY Sheet1 I BOU 130% -_ 0 ODOB 9 * ENG 08-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Σ AutoSum : A Fill Z TU Cell Styles Insert Delete Format 2 Clear Sort & Filter Editing Find & Select Styles Cells Ε L M 392 Calibri 11 A A = = = V Wrap Text General E Copy Paste BI Format Painter U D- DA Merge & Center - $ % , Conditional Format :.: Formatting as Table Clipboard Font Alignment Number E408 A B 390 391 d To calculate sensitivity, we have to take one VARIABLE COST let us take variable cost = 24 393 394 OCF =( (sp-vc)(units) - fixed cost)(1-t) +t(depreciation) 395 OCF =((38.85-24)(90600) - 860000)(1-0.25) + (0.25)*(266250) OCF = 430620 397 398 399 The sensitivity of OCF to changes in VARIABLE COST =change in OCF/change in VARIABLE COST The sensitivity of OCF to changes in VARIABLECOST = (430620-434017.50)/(24-23.95) 401 402 403 e if there is a decrease $1 in variable cost 404 OCF will increase by 67950 (-1 x-67950] 405 396 400 -67950 406 407 408 HON Red BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE 0 NPVRELEVANT ferences SENSITIVITY Sheet1 I 6 - BOU 130% -_ 0 ODOB * * OENG 08-11-2019