Question

We are evaluating a project that costs $571.800. 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 80,000 units per year Price per unit is $40, variable cost per unit is $25. and fixed costs are $685,000 per year. The tax rate is 23 percent, and we require a return of 11 percent on this project 0-1. Calculate the accounting break-even point (Do not found intermediate calculations and round your answer to the nearest whole number, e.g. 32.) a-2.What is the degree of operating leverage at the accounting break even point? (Do not round intermediate calculations and round your answer to 3 decimal places, e... 32161.) b-1. Calculate the base-case cash flow and NPV (Do not round intermediate calculations. Round your cash flow answer to the nearest whole number, e.g. 32 Round your NPV answer to 2 decimal places, eg 32.16.) b-2. What is the sensitivity of NPV to changes in the quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) c. 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... 32.) a 1. Break-even point units b-1. Cash flow b 2. NPVISO

Answer 1

	0	1	2	3	4	5	6
Investment	-571,800
Sales		3,200,000	3,200,000	3,200,000	3,200,000	3,200,000	3,200,000
VC		-2,000,000	-2,000,000	-2,000,000	-2,000,000	-2,000,000	-2,000,000
FC		-685,000	-685,000	-685,000	-685,000	-685,000	-685,000
Depreciation		-95,300	-95,300	-95,300	-95,300	-95,300	-95,300
EBT		419,700	419,700	419,700	419,700	419,700	419,700
Tax (23%)		-96,531	-96,531	-96,531	-96,531	-96,531	-96,531
Net Income		323,169	323,169	323,169	323,169	323,169	323,169
Cash Flows	-571,800	418,469	418,469	418,469	418,469	418,469	418,469
NPV	$ 1,198,548.95

Accounting break-even point = (FC + Depreciation) / (Price - VC) = (685,000 + 95,300) / (40 - 25) = 52,020

Cash Flows = Depreciation + Net Income = 418,469

NPV can be calculated using the same function in excel or calculator with 11% discount rate.

ΔNPV/ΔQ can be calculated by increasing the unit solds by 1 and taking the increase in NPV.

If Q = 80,001, NPV = $1,198,597.81 => ΔNPV/ΔQ = $48.86

Similarly, if VC = 26, OCF = 356,869

ΔOCF/ΔVC = -61,600