Question

We are evaluating a project that costs $1,160,000, has a ten-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 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 35 percent, and we require a 20 percent return on this project. a-1 Calculate the accounting break-even point. Break-even point units a-2 What is the degree of operating leverage at the accounting break-even point? (Round your answer to 3 decimal places. (e.g., 32.161)) DOL b-1 Calculate the base-case cash flow and NPV. (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)) ΔNPVΙΔΟ c. What is the sensitivity of OCF to changes in the variable cost figure? (Negative amount should be indicated by a minus sign.) AOCF/AVC Consider a four-year project with the following information: initial fixed asset investment = $510,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $20; variable costs = $10; fixed costs = $150,000, quantity sold = 81,000 units; tax rate = 34 percent. How sensitive is OCF to changes in quantity sold? (Round your answer to 2 decimal places. (e.g., 32.16)) AOCFIAQ

Answer 1

G3 A B Sales 1 Year units : x for --M2/10 C D E Sale Variabl Contributio Fixed price e cost n per unit costs I J F G H Depreciati on PBT Tax@35% PAT 3 4 2 20 20 20 20 20 5 6 7 8 9 10 11 12 13 14 15 1 44,000 44,000 3 44,000 4 44,000 5 44,000 6 44,000 7 44,000 8 44,000 9 44,000 10 44,000 45 45 45 45 45 45 45 45 45 | 45 25 645,000 25 645,000 25 645,000 25 645,000 25 645,000 25 645,000 25 645,000 25 645,000 25 | 645,000 25 645,000 116,000 | 339,000 118,650 220,350 116,000 339,000 118,650 220,350 116,000 339,000 118,650 220,350 116,000 339,000 118,650 220,350 116,000 339,000 118,650 220,350 116,000 339,000 118,650 220,350 116,000 339,000 118,650 220,350 116,000 339,000 118,650 220,350 116,000 339,000 | 118,650 | 220,350 116,000 339,000 118,650 220,350 K L M N O P Depreciat Operating Total cash PVIF@ ion cash flows Investment flows 20% Present value (1,160,000) (1,160,000) 1.000 $(1,160,000.00) 116,000 336,350 336,350 0.833 $ 280,291.67 116,000 336,350 336,350 0.694 $ 233,576.39 116,000 336,350 336,350 0.579 $ 194,646.99 116,000 336,350 336,350 0.482 $ 162,205.83 116,000 336,350 336,350 0.402 $ 135,171.52 116,000 336,350 336,350 0.335 $ 112,642.93 116,000 336,350 336,350 0.279 $ 93,869.11 116,000 336,350 336,350 0.233 $ 78,224.26 116,000 336,350 336,350 0.194 $ 65,186.88 116,000 336,350 336,350 0.162 $ 54,322.40 20 20 20 | 20 Base case NPV $ 250,137.99 0 20 Sales Sale Variabl Contributio Fixed 16 Year units price le cost In per unit costs 17 18 1 44,001 45 20 25 645,000 2 44,001 45 20 25 645,000 20 3 44,001 45 25 645,000 21 4 44,001 45 25 645,000 22 5 44,001 45 25 645,000 23 6 44,001 45 25 | 645.000 24 7 44,001 45 25 645,000 8 44,001 45 25 645,000 26 9 44,001 45 20 25 645,000 10 44,001 45 25 | 645.000 28 29 20 20 Depreciati Depreciat Operating Total cash PVIF@ on PBT Tax@35% PAT lion cash flows Investment flows 20% Present value (1,160,000) (1,160,000) 1.000 $(1,160,000.00) 116,000 339,025 118,659 220,366 116,000 336,366 336,366 0.833 $ 280,305.21 116,000 339,025 118,659 220,366 116,000 336,366 336,366 0.694 $ 233,587.67 116,000 339,025 118,659 220,366 116,000 336,366 336,366 0.579 $ 194,656.39 116,000 339,025 118,659 220,366 116,000 336,366 336,366 0.482 $ 162,213.66 116,000 339,025 118,659 220,366 116,000 336,366 336,366 0.402 $ 135,178.05 116,000 339,025 118,659 220,366 116,000 336,366 336,366 0.335 $ 112,648.38 116,000 339,025 118,659 220,366 116,000 336,366 336,366 0.279 $ 93,873.65 116,000 339,025 118,659 220,366 116,000 336,366 336,366 0.233 $ 78,228.04 116,000 339,025 118,659 220,366 116,000 336,366 336,366 0.194 $ 65,190.03 116,000 339,025 | 118,659 | 220,366 116,000 336,366 336,366 0.162 $ 54,325.03 20 20 20 NPV Qty increase $ 250,206.11

fix F31 : x V A B C D 31 Break-even point 32 DOL 33 Cash flow 34 NPV 35 ANPV/AQ 36 AOCF/AVC =(F3+63)/E3 E F G 30,440 6.560 $ 336,350 $ 250,137.99 $ 68.13 -$28,600

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