Question

We are evaluating a project that costs $1,740,000, has a 6-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 86,700 units per year. Price per unit is $38.07, variable cost per unit is $23.30, and fixed costs are $821,000 per year. The tax rate is 22 percent, and we require a return of 9 percent on this project. a. 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.) 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 250-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 the nearest whole number, e.g., 32.) e. If there is a $1 decrease in estimated variable costs, how much would the OCF change?

Answer 1

a)

1 NPV Calculation 2 Variables 3 WACC 4 Tax Rate 9% 22% 7 Year/Time 8 Revenue 9 Variable Costs 10 Fixed Costs 11 Net Operating cashflows 12 Taxation @ 22% 13 Tax Saved on Cap.Allowance 14 Initial Investment 15 Net Cashflows 16 Discount @ 9% 17 Present Value of Cashflows 18 19 Net Present Value 3,300,669.00 (2,020,110.00) (821,000.00) 459,559.00 (101,102.98) 63,800.00 3,300,669.00 (2,020,110.00) (821,000.00) 459,559.00 (101,102.98) 63,800.00 3,300,669.00 (2,020,110.00) (821,000.00) 459,559.00 (101,102.98) 63,800.00 3,300,669.00 (2,020,110.00) (821,000.00) 459,559.00 (101,102.98) 63,800.00 3,300,669.00 (2,020,110.00) (821,000.00) 459,559.00 (101,102.98) 63,800.00 3,300,669.00 =86700*38.07 (2,020,110.00) =86700*-23.3 (821,000.00) 459,559.00 (101,102.98) --H11*$B$4 63,800.00 Working 1 (1,740,000.00) (1,740,000.00) 1.000 (1,740,000.00) 422,256.02 0.917 387,390.84 4 22,256.02 0.842 355,404.44 422,256.02 0.772 326,059.12 422,256.02 0.708 299,136.81 422,256.02 0.650 274,437.44 422,256.02 0.596 251,777.47 (1+r) 154,206.13 21 Initial Investment 22 Depreciation 23 Tax saved on Depreciation (Working 1) 24 25 a) Base Case NPV is $154,206.13 1,740,000.00 290,000.00 63,800.00 =B21/6 =B22*22% 26

The base case NPV is $154,206.13

b)

27 b) Sensitivity of NPV to sales Figure 28 29 Sales Per year 30 Variable cost per year 31 Contribution per year 32 33 After tax Contribution per year 3,300,669.00 Calculated Before (2,020,110.00) Calculated Before 1,280,559.00 =SUM(B29:B30) 998,836.02 =B31*(1-0.22) 34 4.486 1-(1+r)-n 35 Annuty Factor 36 37 Present value of Total Contribution 38 39 Sensitivity 40 4,480,697.07 =B33*B35 3.442% =B19/B37

The sensitivity of NPV to changes in sales figure is 3.442%

c)

41 c) Impact of Sales volume 42 43 Selling price per unit 44 Variable cost per unit 45 Contribution per unit 38.07 Given in the Question (23.30) Given in the Question 14.77 =SUM(B43:B44) 46 47 After tax Contribution per unit 11.52 =B45*(1-0.22) 48 49 After tax Contribution for 250 units 2,880.15 =B47*250 50 51 Annuty Factor 4.486 52 53 Present value of Contribution of 250 Units 12,920.12 =B49*B51 54 55 The NPV will decrease by $12,920.12 if there is a decline of 250 units is sales 56 57 Percentage change -8.38% --B53/B19

d)

59 d) Sensitivity of OCF to changes in VC 2,020,110.00 Calculated Above 459,559.00 Calculated Above 61 Total Variable Cost per year 62 Operational cash flow per year 63 64 Sensitivity 23% =B62/161 65

e)

66 e) Impact of decrease of VC in OCF 67 68 Total sales units 86,700 Given in the question 69 70 A decrease in Variable costs will increase the operational cashflow 72 Increase in OCF per year 86,700.00 74 Total Increase in OCF 520,200.00 =B72*6 76 Percentage change 19% =B72/862 77 78 OCF will increase by $86,700 per year or $520,000 for the project life. It will 79 be 19% increase from the base OCF 80