Homework Answers
Expected revenue per year = $6 million
Variable Cost per year = 15% of Revenue
Contribution margin = Revenue(1-% variable Cost) = $ 6 million(1-0.15)
= $ 5.1 million
Fixed Cost per year = $ 1 million
Operating profit = Contribution margin - Fixed Cost
= $ 5.1 million - $ 1 million
= $ 4.1 million
So, Annual cash flows from project = $ 4.1 million
Value of a project in perpetuity = Annual Cash flows/Required Rate of Return
= $ 4.1 million/12%
= $ 34.167 Million
b). Operating leverage= Contribution Margin/Operating Income
= $ 5.1 million/$ 4.1 million
= 1.24 times
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