Question

We are evaluating a project that costs $1,160,000, has a life of 10 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 44,000 units per year. Price per unit is $45, variable cost per unit is $20, and fixed costs are $645,000 per year. The tax rate is 24 percent and we require a return of 13 percent on this project. a. Calculate the accounting break-even point. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b-1. Calculate the base-case cash flow and NPV. (Do not round intermediate calculations and round your NPV answer to 2 decimal places, e.g., 32.16.) b-2. 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. 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.)

Answer 1

a) Accounting Break even = (FC + Depreciation) / (Price - VC)

= (645,000 + 1,160,000 / 10) / (45 - 20)

= 30,440 units

b1)

Sales	1,980,000
VC	(880,000)
FC	(645,000)
Depreciation	(116,000)
EBT	339,000
Tax (24%)	(81,360)
Net Income	257,640
Cash Flow	373,640

Cash Flow = Net Income + Depreciation = 373,640

PV of cash inflows can be calculated using PV function

N = 10, I/Y = 13%, PMT = 373,640, FV = 0 => Compute PV = $2,027,461.61

NPV = 2,027,461.61 - 1,160,000 = $867,461.61

b2) For example, sales is increased by 1 unit to 44,001, then NPV = $867,564.71

Hence, Sensitivity = Change in NPV = $103.10

b3) Similarly if VC = 21, OCF = $340,200 => Sensitivity = Change in OCF = $33,440