Question

We are evaluating a project that costs $841,297, has an eight-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 62,152 units per year. Price per unit is $40, variable cost per unit is $21, and fixed costs are $422,878 per year. The tax rate is 35%, and we require a return of 19% on this project. In dollar terms, what is the sensitivity of NPV to changes in the units sold projection? (Round answer to 2 decimal places. Do not round intermediate calculations)

Answer 1

OCF at 62,152 units = [(P-v)Q-FC](1 - 1) + TD $529,513 ((40-21)*(62152)-422878)*(0.65)+0.35*(841297/8) NPV = OCF X (PVIFA 19%,8 Years ] - initial cost = $1,252,591.99 529513 x (PVIFA 19%,8 Years ] - 841297 OCF when increase in one unit: OCF = [P-V)Q-FC](1 - 1) + TD $529,526 (40-21)*(62153)-422878)*(0.65)+0.35*(841297/8) NPV = OCF X (PVIFA 19%,8 Years ] - initial cost = $1,252,640.83 529526 x (PVIFA 19%,8 Years ] - 841297 sensitivity ANPV/AQ = $48.84 ||(1252640.83-1252591.9) ]