Question

We are evaluating a project that costs $1.446,000, has a six-year Me, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 88,600 units per year. Price per unit is $35.05, variable cost per unit is $21.30, and fixed costs are $766,000 per year. The tax rate is 30 percent, and we require a return of 11 percent on this project 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.) Base-case operating cash flow NPV 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.) Sensitivity of NPV If there is a 500-unit decrease in projected sales, how much would the NPV drop? (Input your answer as a positive value. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV drop 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.) Sensitivity of OCF If there is $1 decrease in estimated variable costs, how much would the increase in OCF bo? (Do not round Intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Increase in OCF

Answer 1

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W ? v L 1 ENG 01:43 17-02-2020 24 A554 Formula Bar к 554 depreciation = 1446000/6 = 241000.00 555 556 557 558 559 ANSWER 560 561 OCF =( (sp-vc)(units) - fixed cost)(1-t) + t(depreciation) OCF = ( (35.05-21.3)(88600) - 766000)(1-0.3) + (0.3)* (241000) OCF = 388875 562 563 NPV = NPV = NPV = NPV = Present value of all cash flows - investment (388875 x PVIFA @11%,6 years) - 1446000 (388875 x 4.2305379) - 1446000 199150.41 NOTE PVIFA @ 11%, 6 YEARS (1/r)*(1-(1/(1+r)^n)) (1/0.11)*(1-(1/(1+0.11)^6)) 4.2305379 564 ANSWER 565 566 567 568 To calculate sensitivity, we have to take one more sales units let us take sales units = 89000 569 570 571 OCF =((sp-vc)(units) - fixed cost)(1-t) + t(depreciation) OCF =( (35.05-21.3)(89000) - 766000)(1-0.3) + (0.3)*(241000) OCF = 392725 572 573 NPV = 575 576 577 NPV = NPV = NPV = Present value of all cash flows-investment (392725 x PVIFA @11%,6 years) - 1446000 (392725 x 4.2305379) - 1446000 215437.98 yen dollar hege payback irr BEST WORST PRICEQUANTITY ... NPV NEW MACHINE OCF ACC BE, CASH BE, FIN BE BASE CASE SENSITIVITY

W ? v L 1 ENG 01:43 17-02-2020 24 A601 A B C D E F G H I J K L - 578 The sensitivity of NPV to changes in units change in NPV/change in units The sensitivity of NPV to changes in units =(215437.98 - 199150.41)/(89000-88600) - 580 ANSWER 40.719 581 582 IF SALES DROP BY 500 UNITS THEN NPV WILL DECREASE BY = 583 ANSWER 20359.46 [40.719 X 500] 584 585 586 To calculate sensitivity, we have to take one VARIABLE COST let us take variable cost = 21 588 589 590 591 OCF = (sp-vc)(units) - fixed cost)(1-t) + (depreciation) OCF = ( (35.05-21)(88600) - 766000)(1-0.3) + (0.3)* (241000) OCF = 407481 The sensitivity of OCF to changes in VARIABLE COST Echange in OCF/change in VARIABLE COST The sensitivity of OCF to changes in VARIABLE COST =(407481-388875)/(21-21.3) = 593 -62020 594 595 596 ANSWER 597 if there is a decrease $1 in variable cost OCF will increase by 62020 (-1 x-62020) 598 599 600 601 ... NPV NEW MACHINE yen dollar hege payback irr BEST WORST PRICEQUANTITY OCF ACC BE, CASH BE, FIN BE BASE CASE SENSITIVITY