Question

3. A project costs $1,400,000, has a four year life, and no re-sale value at the end of the project. Depreciation is straight-line to zero. The opportunity cost of capital is 9% and the tax rate is 34%. Sales are projected at 110 units per year. The price per unit is expected to be $30,000, variable costs are projected at $20,500 per unit, and fixed costs will be $515,000 per year. Cash flows from operations are received annually beginning in one year.

   1. (a) What is the NPV?

   2. (b) Conduct a sensitivity analysis with respect to selling price projections (only)

      assuming a pessimistic case and an optimistic case corresponding to plus/minus 10% of the base-case. Assume this project is part of an otherwise profitable corporation that pays corporate tax.

   3. (c) What are the accounting and economic break-even level of sales using expected values?

Answer 1

Intially explained all the data in the question.

Calculating Annual Cash Flows

Discounting the annual cash flows to the present value for calculation of NPV.

Calculating NPV. Answer is $118771.

Calculating NPV of pessimistic and optimistic change in selling price by 10% on base case price side by side in a tabular format.

Calculating Breakeven Sales by accounting perspective where answer is 91 units.

And in calculation of economic breakeven we do back calculation by taking NPV as $0. Answer is 68 units.

Page No. Date Solution: Project Cost Cat time to = $ 1400000 Present Value of cash outflows = $1400 000 Re-sale Value = o Project life (n)=0 Ton SLM) Depreciation = 1400 000-0$350000 4 Cost of Capital (6) = qop Tan rate (t) = 34% Selling price per unit & £3000o Number of units solde 110 units Total Sales = 110 x 30000 = $3300 ovo hare cscanned with contable coset - $20500 unit S

Total Variable Cost (VC) = 20500 * 110 = $ 2255000

Pact . E DE Total fixed cost- $515,000 Cash flow Table Particulars . Amount ($) Sales 3300 000 des Variable cost 2255000 Contribution 10u5000 Less fixed Cost 515ooo (CEBTRO Cash flows before deprediction 530000 Less Depreciation 35000 (PBT) Pruf it before Tom 180000 Tan (341) 61200 (PAT Profit After Tor 118800 Add Depreciation 350000 Annual Cash Puflows $468800 I ra qol na upears. Present Value Annuity factors C1- (+4) PVA Pat, 4) er - (1 = (1+0.09) 0.09 23.2397 CS Scanned with CamScanner

Present Value inflows = Annel, cash inflows & Puff. 4,68,800 X 3.2397 -$15,12,771 Coppor) a Net Present Vanow. Prof inflows- Proj outflous = 1516771 - 1400000 - $ 118,771 Scanned with CamScanner

(6) Sensitivity Analysis Particular Pessimistic Optimuste 36000 +104 30000 -10°/. splunit 27500 33000 - 27000 x 110 33ooox 110 2970000 3630000 less (fixed cost 2770000 2720000 t Vanable cost) 860000 25០០ល O CABIED 200000 less Depreciation 350000 PBT (15000) less Ton 34% Ci57000 Add Dep. 35000 Armed cash flows 200000 510000 173400 1336600 350ro 686600 3.2397 Add Dep nhlows 3. 2397 2224378 NUD 1400 oro Top Vof Iulows 647940 - Prof outflour 1400000 NPV, 452060) Change in NPV from (870831) of change with (733.20p) respect to 118771 £24378 705607 594.09% T18th CS Scanned with CamScanner

% change in NPV are -733.2% and 594.09%

So, by this we can is highly sensitive per unit as with selling price there the NPV. say that the NPV to the selling price 10%. Chaye in is drastic change in Break even levels of sales Accounting :- In accounting break-even, it achieves breakeven when there is no profit no less, so for that the ton contribution should be equal to the fixed ust. Break even sales = fixed cost Contribution / unit Contribution per unit Sprunit - velunt - 30000 - 20000 = $9500

(Page No. Date: fixed lost will also incluede depreciation y to tal fivee cast: 515000 + 350oro 2 865000 Break even Sulen 2 865000 9520 = 91.05 91 units (appron) Total Sales at 91 units = 91x 30000 2230000 less Variable wasta 91% 2050 = 1865320 Posul Contribution = 864500 Les w fired cost Depreciation o . = 865000 Poolit -8-1580- ($500) So at al with there is a small loss of foo writy thats is because of rounding off, so lang soles above, al units will generate accounting profits CSScanned with CamScanner

Economici Economic break even es acheived when the NPV of the project is O, NPV = 0 = Prof inflows - Prof outflows Prol inlows: Prof outflows pvol inflows- $1400000 To ta calculate break even salen, we need to calculate everything backwards from botom to top. PUAFE 3.2397 14 Annual Cash flows = Prof inflows Prar 1400 ono 3.297 $432139 T Scanned with CamScanner

flows Lees Annual cash Depreciation PAT 432139 350000 82139 PBT = PAT/1-2 = 82139 (1-0.34) Add fixed Cost 124453 3515000 - Total Contribution required 639453 (for break even sales units) Breakeven Sales units = 639453 9500 Contnmetion contribution ſan't = 67,31 units = 68 units. So economically er 68 units the brak even sales would es scanned with CamScanner