Question

Problem 7-1 Sensitivity Analysis and Break-Even Point 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 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 30440 units point 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.) S336350 Cash flow $250137 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.) 68.12 ΔΝΡV/Δ c. What is the sensitivity of OCF to changes in the variable cost figure? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) ΔOCF/ΔVC

Answer 1

Depreciation = $116,000 [1160000/10 ] Break even point = [fixed cost + depreciation]/(saleprice-variable cost) 30,440 Units (645000+116000)/(45-20)

b-1) OCF base = [(P-V)Q-FC](1 - 1) + TD = $336,350.00 ((45-20)*(44000)-645000)*(0.65)+0.35*(116000) NPV = OCF X (PVIFA 20%,10Years ] - initial cost = $250,137.99 336350 x [PVIFA 20%, 10Years ] - 1160000 b-2) NPV when units = 45000 units OCF = [P-v)Q-FC](1 - 1) + TD $352,600 ((45-20)*(45000)-645000) * (0.65)+0.35*(116000) NPV = OCF x [PVIFA 20%, 10Years ] - initial cost = $318,265.66 352600 x [PVIFA 20%,10Years ] - 1160000 ANPV/AQ = $68.13 [(318265.66-250137.99)/(45000-44000)]

C) NPV when variable cost decrease by $1 OCF = [(P-v)Q-FC](1 – T) + TD = $364,950 ((45-19) *(44000)-645000) * (0.65)+0.35*(116000) AOCF/AVC = $28,600 [(364950-336350)/(19-20)]