Question

We are evaluating a project that costs $1.980.000, has a 7-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 89.100 units per year. Price per unit is $38.55. variable cost per unit is $23.70, and fixed costs are $845.000 per year. The tax rate is 25 percent, and we require a return of 10 percent on this project. a. Calculate the base-case operating cash flow and NPV. (Do not round Intermediate culations 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... 32.181.) c. If there is a 300-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., 32.10.) 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.) a. Base-case operating cash flow Base-case NPV b. NPV sensitivity c. NPV change d. OCF sensitivity e. OCF change

Answer 1

I J Sale Tax@25% PAT - X ✓ fx --M2/7 A B C D E F G H Sales Variable Contributio Fixed Depreciat 1 Year units price cost n per unit costs ion PBT 2 0 3 1 89,100 $38.55 $ 23.70 $ 14.85 845,000 282,857 | 195,278 4 2 89,100 $38.55 $ 23.70 $ 14.85 845,000 282,857 195,278 5 3 89,100 $38.55 $ 23.70 $ 14.85 845,000 282,857 195,278 6 4 89,100 $38.55 $ 23.70 $ 14.85 845,000 282,857 195,278 7 5 89,100 $38.55 $ 23.70 $ 14.85 845,000 282,857 195,278 6 89,100 $ 38.55 $ 23.70 $ 14.85 845,000 282,857 195,278 9 7 89,100 $ 38.55 $ 23.70 $ 14.85 845,000 282,857 195,278 10 11 12 48,819 48,819 48,819 48,819 48,819 48,819 48,819 $_3789,100 $ 38.55 $ 23.70 K L M N O P Depreciat Operating Total cash PVIF@ ion cash flows Investment flows 10% Present value (1,980,000) (1,980,000) 1.000 $ (1,980,000.00) 282,857 429,316 429,316 0.909 $ 390,286.85 282,857 429,316 429,316 0.826 $ 354,806.23 282,857 429,316 429,316 0.751 $ 322,551.12 282,857 429,316 429,316 0.683 $ 293,228.29 282,857 429,316 429,316 0.621 $ 266,571.17 282,857 429,316 429,316 0.564 $ 242,337.43 282,857 429,316 429,316 0.513 $ 220,306.75 146,458 146,458 146,458 146,458 146,458 146,458 146,458 Base case NPV $ 110,087.83 Sale price Sales 13 Year units 14 0 15 1 88,800 16 2 88,800 17 3 88,800 18 41 88,800 19 5 88,800 20 6 88,800 21 788,800 $38.55 $38.55 $38.55 $38.55 $ 38.55 $ 38.55 $38.55 Variable Contributio Fixed Depreciat Depreciat Operating Total cash PVIF@ cost In per unit costs ion PBT Tax@25% PAT lion cash flows Investment flows 10% Present value (1,980,000) (1,980,000) 1.000 $ (1,980,000.00) $ 23.70 $ 14.85 845,000 282,857 190,823 47,706 143,117 282,857 425,974 425,974 0.909 $ 387,249.35 $ 23.70 $ 14.85 845,000 282,857 190,823 47,706 143,117 282,857 425,974 425,974 0.826 $ 352,044.86 $ 23.70 $ 14.85 845,000 282,857 190,823 47,706 143,117 282,857 425,974 425,974 0.751 $ 320,040.79 $ 23.70 $ 14.85 845,000 282,857 | 190,823 47,706 143,117 | 282,857 425,974 425,974 0.683 $ 290,946.17 $ 23.70 $ 14.85 845,000 282,857 190,823 47,706 143,117 282,857 425,974 425,974 0.621 $ 264,496.52 $ 23.70 $ 14.85 845,000 282,857 190,823 47,706 143,117 282,857 425,974 425,974 0.564 $ 240,451.38 $ 23.70 $ 14.85 845,000 282,857 190,823 47,706 143,117 282,857 425,974 425,974 0.513 $ 218,592.16 22 23 NPV Qty decrease $ 93,821.23

Sales Year units Sale price Variable Contributio cost n per unit Fixed costs Depreciation PBT Tax@25% PAT 0 1 89,100 2 89,100 3 89,100 4 89,100 5 89,100 6 89,100 7| 89,100 $38.55 $ 22.70 $ 38.55 $ 22.70 $38.55 $ 22.70 $ 38.55 $ 22.70 $38.55 $ 22.70 $38.55 $ 22.70 $ 38.55 $ 22.70 $ $ $ $ $ $ $ 15.85 15.85 15.85 15.85 15.85 15.85 15.85 845,000 845,000 845,000 845,000 845,000 845,000 845,000 282,857 | 284,378 282,857 | 284,378 282,857 | 284,378 282,857 | 284,378 282,857 | 284,378 282,857 284,378 282,857 | 284,378 71,094 213,283 71,094 213,283 71,094 213,283 71,094 213,283 71,094 | 213,283 71,094 213,283 71,094 213,283 Depreciat Operating Total cash PVIF@ ion cash flows Investment flows 10% Present value (1,980,000)| (1,980,000) 1.000 $ (1,980,000.00) 282,857 | 496,141 | 496,141 0.909 $ 451,036.85 282,857 | 496,141 496,141 0.826 $ 410,033.50 282,857 | 496,141 496,141 0.751 $ 372,757.73 282,857 496,141 496,141 0.683 $ 338,870.66 282,857 | 496,141 496,141 0.621 $ 308,064.24 282,857 496,141 496,141 0.564 $ 280,058.40 282,857 496,141 496,141 0.513 $ 254,598.54 NPV VC decrease $ 435,419.92 Base-case OCF Base-case NPV NPV sensitivity NPV change OCF sensitivity OCF change $ 429,315.54 $ 110,087.83 54.222 -$16,266.60 $66,825 66,825

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