Question

We are evaluating a project that costs $1.68 million, has a six-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 90,000 units per year. Price per unit is $37.95, variable cost per unit is $23.20, and fixed costs are $815,000 per year. The tax rate is 21 percent, and we require a return of 11 percent on this project. a. Calculate the base-case 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 500-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 2 decimal places, e.g., 32.16.) If there is a $1 decrease in estimated variable costs, how much would the increase in OCF be? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Base-case cash flow NPV b. NPV sensitivity NPV change d. OCF sensitivity e. Change in OCF

Answer 1

x --M2/6 for D Variable cost H I J E Contribution Fixed per unit costs F G Deprecia tion PBT Tax@21% PAT A B C Sales Sale 1 Year units price 20 3 1 90,000 $ 37.95 4 2 90,000 $ 37.95 5 3 90,000 $ 37.95 6 4 90,000 $ 37.95 7 5 90,000 $ 37.95 8 6 90,000 $ 37.95 9 -Nm to $ 23.20 $ $ 23.20 $ $ 23.20 $ $ 23.20 $ $ 23.20 $ $ 23.20 $ 14.75 14.75 14.75 14.75 14.75 14.75 815,000 280,000 815,000 280,000 815,000 280,000 815,000 280,000 815,000 280,000 815,000 280,000 232,500 232,500 232,500 232,500 232,500 232,500 48,825 48,825 48,825 48,825 48,825 48,825 183,675 183,675 183,675 183,675 183,675 183,675 K L M N O PT Depreciat Operating Total cash ion cash flows Investment flows PVIF@11% Present value (1,680,000) (1,680,000) 1.000 $ (1,680,000.00) 280,000 463,675 463,675 0.901 $ 417,725.23 280,000 463,675 463,675 0.812 $ 376,329.03 280,000 463,675 463,675 0.731 $ 339,035.16 280,000 463,675 463,675 0.659 $ 305,437.08 280,000 463,675 463,675 0.593 $ 275,168.54 280,000 463,675 463,675 0.535 $ 247,899.59 25 Base case NPV $ 281,594.64 Sale price Variable Contribution Fixed cost per unit costs Deprecia tion PBT Tax@21% PAT Sales 12 Year units 13 0 14 1 89,500 15 2 89,500 16 3 89,500 17 4 89,500 18 5 89,500 19 6 89,500 20 $ 37.95 $ 37.95 $ 37.95 $ 37.95 $ 37.95 $ 37.95 $ 23.20 $ 23.20 $ 23.20 $ 23.20 $ 23.20 $ 23.20 $ $ $ $ $ $ 14.75 14.75 14.75 14.75 14.75 14.75 815,000 280,000 815,000 280,000 815,000 280,000 815,000 280,000 815,000 280,000 815,000 280,000 225,125 225,125 225,125 225,125 225,125 225,125 47,276 47,276 47,276 47,276 47,276 47,276 177,849 177,849 177,849 177,849 177,849 177,849 Depreciat Operating Total cash ion cash flows Investment flows PVIF@11% Present value (1,680,000) (1,680,000) 1.000 $ (1,680,000.00) 280,000 457,849 457,849 0.901 $ 412,476.35 280,000 457,849 457,849 0.812 $ 371,600.32 280,000 457,849 457,849 0.731 $ 334,775.06 280,000 457,849 457,849 0.659 $ 301,599.15 280,000 457,849 457,849 0.593 $ 271,710.95 280,000 457,849 457,849 0.535 $ 244,784.64 NPV with decreased Qty $ 256,946.47 | 22 23 Base-case OCF 24 Base-case NPV 25 NPV Sensitivity 26 NPV change 27 OCF Sensitivity 28 OCF change 463,675 $ 281,594.64 $ 49.296 -$24,648.17 -$71,100 71,100

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