Question

We are evaluating a project that costs $848,000, has an eight-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 62,000 units per year. Price per unit is $40, variable cost per unit is $20, and fixed costs are $636,000 per year. The tax rate is 35 percent, and we require a return of 20 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.)

Break-even point            units

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.)

Cash flow	$
NPV	$

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.)

ΔNPV/ΔQ          $  

b-3 Calculate the change in NPV if sales were to drop by 500 units. (Enter your answer as a positive number. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV would  (Click to select)  increase  decrease  by $  

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.)

ΔOCF/ΔVC          $

Answer 1

F43 XP25-P12)/-500 Sales Sale Variable Contributio Fixed Depreciat Deprecia Operating tion Total cash PviF@ 27 Year units 28 0 29 30 31 32 4 62,000 40 33 5 62,000 40 34 35 7 62,000 40 36 37 38 39 ice cost r unit costs cash flows Investment Iflows 1096 | Present value (848,000) (848,000)1.000 $ (848,000.00) 389,400 0.833 324,500.00 389,400 0.694$ 270,416.67 389,400 0.579 225,347.22 389,400 0.482 187,789.35 389,400 0.402 156,491.13 389,400 0.335$ 130,409.27 389,400 0.279 108,674.39 389,400 0.233$90,561.99 ion PBT Tax@23% |PAT 1 62,000 40 62,000 40 3 62,000 40 21 21 21 21 21 21 21 21 19 636,000 106,000 436,000 152,600 283,400 106,000389,400 19636,000 106,000 436,000 152,600 283,400 106,000389,400 19 636,000 106,000 436,000 152,600 283,400 106,000 389,400 19636,000 106,000 436,000 152,600 283,400 106,000389,400 19 636,000 106,000 436,000152,600 283,400 106,000389,400 19 636,000106,000436,000152,600 283,400 106,000 389,400 19 636,000 106,000436,000 152,600283,400106,000389,400 19 636,000 106,000 436,000 152,600 283,400106,000 389,400 662,000 40 8 62,000 40 NPV VC increase $ 646,190.03 40 Accounting break-even 41 Base-case cash flow 42 Base-case NPV 37,100 $ 429,700 $ 800,827.57 $49.883 $ 24,941.54 -$40,300 44 NPV decrease by