Question

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. 0:45 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.g., 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.) aces a. Base-case operating cash flow Base-case NPV b. NPV sensitivity c. NPV change d. OCF sensitivity e. OCF change e provo of 10 Next.

Answer 1

Base case Operating Cash Flow	434,018
Base case NPV	103,507.34
Sensitivity of NPV	50.3367%
Change in NPV	(25,878.56)
Sensitivity of OCF	-3.750%
OCF Change	(67,950)

ECODY Calib - Wrap Tea 1 Broste Format Painter cupboard 11 -3 A - E Font Merge & Center 4 23 Conditional Format Formatting as Table Cell Styles Alignm Base case Operating Cash Flow Η . Calculation of Depreciation Machinery Year Investment 2130000 Depreciation Rate 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% Depreciation 266250 266250 266250 266250 266250266250266250 266250 Accumulated Depreciation 266250 532500 7 98750 1065000 1331250 1597500 1863750 2130000 CASH FLOW CALCULATION OF THE PROJECT Year Ory, to be sold (A) 90600 90600 9 0500 906 906009060090600 90600 Sales Price (B) 38.85 38.85 38.85 38.85 138.85 38.85 38.85 Variable Cost C) 23.95 23.95 2 3.95 23.95 23.95 23.95 23.95 23.95 Sheet Sheyt /She Sheet1 Sheed Short Sheet3 Sheed Sheets Shell Sheet (2) Testination and TESS ENTER or choose Paste Average 954.19398 Count 12 Sum: 4857251596 100

Xcut Carl - - IR DO Arch Conditional Format Cell Insert Delete Foma Pote Format Painter Merge Center a Formatting - as Table Styles Clipboard Contribution D (B-C) 9 14. 1 4.9 149 Total value (ASD) 1349340 1349940 13419910 1349940 1941 1940 19499-50 1379940 Fixed Expenses KO 860000 360000 850000 ECOBIX REN 000 Depreciation 266250 266250 206250 266250 266250200250266250266250 Total Fixed Cost 1126250 1126250 1126250 1126250 1126250112625011262501126250 Total 223690 223690 223690 223600 IN 228690 223090 223090 222690 Tax 25% 55922.5 55922.5 55922.5 559225 8 922.5 55922559225 55022.5 Post Tax 1677675 1672675 1672675 1677675 167767.5 677675 2 06256 167767.5 266250 167767.5 265250 266250 Add: Depreciation 266250 2 66250 266250 256250 434,018 434,018 434,018 14018 434,018 444,018 Operating Cash Flow Calculation of NPV Cash Outflow Machiney

Catei - - A Insert D e Format Sort Filter Find Seid C2 - SENSITIVITY OR NPV TO CHANGE IN SALES FIGURE Calculation of NPV MIN Cash Outflow Machiney Cash in Flow Income 444017.5 434017.5 434017.5 437017.5 434017.5 434,018 434,018 434,018 Discounting Factor Total @11% WACC 434017.5 0.9009 434017.5 0.8116 434017.5 0.7312 431017.5 0.6587 434017.5 0.5935 434017.5 0.5346 434017.5 0.4817 434017.5 0.4339 391,006.76 352,258.34 317,349.86 285,900.77 257,568.26 232,043.48 209,048.18 188,331.69 2.233,507.34 NPV of the Project is 103.507.14 SENSITIVITY OF NPV TO CHANGE IN SALES FIGURE She Sheets Shelto n Sheet Set Sheetlo Shantil Sveti Sheet2 Sheet3

to Copy 23 Mergea Center al Conditional Formatting inson Delete formato Forman Table Coll Styles Number capboard Ctoo - AB SENSITIVITY OF NIP TO CHANGE IN SALES FIGURE Change by 1% Year Qty. to be sold (A) 91506 91506 91506 91506 91506 9150692506 38.85 38.85 38.85 Sales Price (B) 1985 38.85 38.85 39.95 3 885 Variable Cost(C) 23.95 23.95 23.95 23.95 23.95 123.95 2 3.95 23.95 Contribution D (B-C) 14.9 14.9 14.9 14.9 14.9 11.9 14.9 11.9 Total value (AD) 1363439.4 1363439.4 1363439.4 1363439.4 1363439.4 13634394 1363439 1163439.A 360000 860000 360000 Fixed Expenses 860000 860000 860000 860000 860000 2 66250 2662502 66250 266250 256250 256250 266250 266250 Depreciation 1126250 1126250 1126250 1126250 1 126250 1126250 1126250 1126250 Total Fixed Cost 237189.4 237189.4 237189. 2371894 237189.4 237189.4 237189,4 2371894 Total 59237.15 59297.35 59297.35 59297.35 59297.35 59297.35 59297.35 59797.25 Tax @25% Sheets Sheetto Sheet1 Sheet Set 2 st

'Hote insen nago Lasna Formulas Dan Brow now Paste Fema le Oustom S. Number Conditional Format Formatting Table Merge Center Alamint Collinsert De Styles Formal Sort Find Font 612R/1.11 OFF H. HK 177802/05 177892.05 1772.05 177892.05 177892.06 177892.00 177892.05 177492.05 Post Tax Add: Depreciation 266250 266250 7 66250 765750 766250266250206290266250 Cash Flow from incorne Side 444142.US 444112.05 441142.05 444142.05 444142 4 41142.15 14142.5 444142.US Calculation of NPV Cash Outflow 210000 Cash in Flow 2 444147.65 414142.05 414142.05 441147.00 444142.05 444112.05 444142.05 444142.05 Sheeto Discounting Factor Total 21% WACC 444142.05 0.9909 444142.05 0.811b 444142.05 0.7812 444142.05 0.6587 444142.05 0.5925 444142.05 (1.5245 444142.05 01.4917 414142.05 (1.432 S hoe S heet. Short Sheets 400,127.97 366,475.65 324,152.81 292,570.13 263,576.69 237,456 48 213,924.3 192.725.00 129 (2) Shree Sheet Sheet EU 12:51 PM Ready A go

View - X Data Review === = General 3. Autosum te Copy > = Wrap Text Merge & Center Paste S Home Insert Page Layout Formulas & Cut Caliber 1 A format Painter BIUD A Clipboard Font G153 - А в o l Insert Delete Format Conditional Format Cell Formatting as Table Styles Clear Clear 5ort Filter Fditing Find & Select 130 2,285,609.51 132 NPV of the Project is 155,609.51 135 Base Case NPV 103,507.34 236 137 52, 102.18 Change in NPV 0.5031 138 199 NPV CHANGE-DECREASE IN SALES BY 450 UNITS Year 90150 90150 Qty. to be sold (A) 90150 90150 90150 9015090150 90150 38.25 39.85 38.95 28.85 33.95 38.85 38.85 Sales Price (B) 38.65 143 145 23.95 23.95 21.95 23.95 23.95 23.55 23.95 Variable Cost(C) 29.95 150 151 152 14.9 14.9 14.9 14.9 14.9 14.9 14.9 Contribution D=1B-C) 1343235 1343235 1343245 154 Total value (AD 5 She Sheets (2) She 1349225 1348225 Short Sheet1 Sheet Sheeto 1342 235 L Sheet2 1242285 Sheet3 P

Hill Merge & Center Alignment Conditional Format Formatting as Table Cell Styles Insert Delete Format Clear Font Number aste Format Painter Chipboard G179 A B Sort & Find & Filter - Select Editing D L M 860000 860000 I 860000 Fixed Expenses 860000 J 860000 K 860000 860000 860000 Depreciation 266250 266250 2 66250 266250 266250 2 66250 266250 266250 Total Fixed Cost 1126250 1126250 - 1126250 1126250 1126250 1126250 1126250 1126250 Total 216985 216985 216985 216985 216985 216985 2 16985 216985 Tax @25% 54246.25 54246.25 51246.25 51216.25 54246.25 54246.25 54246.25 54246.25 Post Tax 162738.75 162738.75 162738.75 452738.75 152738.75162738.75 162738.75 162738.75 Add: Depreciation 266250 266250 256250 256250 2 66250 266250 256250 266250 Operating Cash Flow 428,989 428,989 428,989 428,989 4 28,989428,989 428,989 428,989 Calculation of NPV Cash Outflow Machiney 2130000 2130000 Cash In Flow Discounting Factor Sheet2 Sheet3

Alignment Number Clear 0201 Styles Filter - Select - Editing Year Cash In Flow Year 182 184 185 186 187 188 Income 428988.75 428988.75 428988.75 428988.75 428988.75 428,989 428,989 428,989 Discounting Factor Total @11% WACC 428988.75 0.9009 428988.75 0.8116 428988.75 0.7312 428988.75 0.6587 428988.75 0.5935 428988.75 0.5346 428988.75 0.4817 428988.75 386,476.35 348,176.89 313,672.88 282,588.18 254,583.94 229,354.90 206,626.04 186,149.59 0.4339 2,207,628.17 NPV of the Project is 77,628.77 Base Case NPV 103,507.34 195 196 Change in NPV 197 (25,878.56) SENSITIVITY OF OCF TO CHANGE IN VA RIABLE COST 198 199 200 201 202 Year 34 Sheet1 Sheet Sheet2 Sheet3 CHANGE BY 1%-increase Sheets Sheet Sheet (2) Sheet4 Sheet Sheets Sheat10 Ready

Formatting Styles 0 Clear Filter - Select board Table Styles Font Alignment Number Editing G223 A TB н SENSITIVITY OF OCF TO CHANGE IN VARIABLE COST Year CHANGE BY 1%-increase Qty, to be sold (A) 90600 90600 90600 90600 9060090600 90600 Sales Price (B) 38.85 38.85 38.85 38.85 38.85 38.85 38.35 24.1895 24.1895 Variable Cost (C) 24.1895 24.1895 24.1895 W 24.1895 24.1895 24.1895 14.6605 14.6605 14.6605 Contribution DHB-C) 14.6605 14.6605 14.5605 14.6605 14.6605 Total value (APD) 1328241.3 1328241.3 1828241.3 1328241.3 1378241.3 13282411 13287413 1328241.3 860000 860000 860000 860000 860000 Fixed Expenses 860000 960000 860000 766250 266250 266250 266250 266250 Depreciation 265250 266250 266250 1176250 Total Fixed Cost 1126250 1176250 1126250 201991.3 201991.3 Total 201991.: 20:1991.3 1 126250 1126250 1126250 126250 201991.3 201991. 3 2019913201991.3 50497.82550497.80950167.825 50497.825 Tax (@259 50497.825 50497.825 50497825 5 0497.825 She She Sheet (2) She She Shootloo Sheta Sheet s ha

G246 -F246 L M I 50497.825 N Tax @25% 50497.825 50497.825 50497.825 50497.825 50497.825 J 50497.825 K 50197.825 Post Tax 151493.475 151493.475 151493.475 151493.475 151493.475 151493.475 151493.475 151493.48 Add: Depreciation 266250 266250 266250 266250 266250 266250 256250 266250 Operating Cash Flow 417,743 417,743 417,743 417,743 417,141 417,141 417,743 417,743 BASE CASE Operating Cash F 434,018 434,018 434,018 434,018 434,018 434,018 434,018 434,018 SER Change in OCF (16,274) (15,274) (16,274) 116,274) 116,274 116,274) (16,274) (16,274) 233 % Change -3.750% -3.750% LE -3.790% -3.750% -3.750% -2.750% -3.750% 234 235 CHANGE IN OCE WITH CHANGE IN VARIABLE COST BY SA 238 239 240 CHANGE BY 1%-increase 90000 90600 90600 90600 90600 90500 90600 city. to be sold (A) (242 243 244 245 38.35 38.85 38.85 RS 2.85 Sales Price (B) 24 24.95 2495 Variable Cost (C) Sees Sheens Shoes (2) 24.05 231 Sheet3 20.55 Short She Sheet Sheeto h et Ready

Clipboard Font Alignment f Base case Operating Cash Flow G Variable Cost (C) 24.95 24.95 24.95 24.95 24.95 24.95 24.95 24.95 Contribution DHB-C) 13.9 13.9 13.9 13.9 13.9 Total value (AD) 1259340 1259340 1259340 1259340 1259340 1259340 1259340 1259340 Fixed Expenses 860000 860000 860000 860000 860000 Depreciation 266250 266250 266250 266250 266250 266250 266250 266250 Total Fixed cost 1126250 1126250 1126250 1126250 1126250 1126250 1126250 1126250 Total 133090 133090 133090 133090 133090 Tax @25% 33272.5 33272.5 33272.5 33272. 5 3 3272.5 33272.5 33272.5 33272.5 Post Tax 99817.5 99817.5 99817.5 99817.5 99817.5 99817.5 99817.5 99817.5 Add: Depreciation 266250 266250 266250 266250 5266250266250266250 266250 261 262 263 264 265 266 267 268 269 Operating Cash Flow 366,068 366,068 3 66,068 366,068 366,068 366,068 366,068 366,068 434,018 434,018 BASE CASE Operating Cash F 434,018 434,018 434,018 434,018 434,018 Change in OCF (67,950) 270 (67,950) (67,950) (67,950) (67,950) (67,950) (67,950) (67,950) Chat Sheets