Question

We are evaluating a project that costs $500,000, has a life of 8 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 50,000 units per year. Price per unit is $40, variable cost per unit is $25, and fixed costs are $600,000 per year. The tax rate is 22 percent and we require a return of 12 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.) 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.) a. units Break-even point b-1. Cash flow NPV b-2. ANPVIAQ c. AOCFIAVC

Answer 1

a	Fixed Cost	600000
	Add Depreciation	62500
	Total Fixed Cost	662500
	Depreciation	500000/8	62500
	Break even point = Fixed Cost / Contribution per unit
		662500 / (40-25)
		44167	Units
b -1	OCFbase= [(P – v)Q – FC](1 – tc) + tcD
	= ((40-25)50000 - 600000)(1-0.22)+0.22*62500
	= $130750
	NPV
	There is no salvage value
	NPVbase= –$500,000 + $130,750(PVIFA12%,8)
	= $479680
b -2	For Sencitivity we will calculate the NPV at a different quantity
	Here we will use quatity is 60000
	OCFNew= [(P – v)Q – FC](1 – tc) + tcD
	= ((40-25)60000 - 600000)(1-0.22)+0.22*62500
	= $247750
	NPV
	There is no salvage value
	NPVNew= –$500,000 + $247,750(PVIFA12%,8)
	=$ 1367044
	So, the change in NPV for every unit change in sales is:
	∆NPV/∆S = ($479680 – 1367044)/(50,000 – 60,000)
	∆NPV/∆S = +$88.7364
c	For Sencitivity we will calculate the NPV at a different Variable Cost
	Here we will use Variable cost is 26
	OCFnew= [($40 – 26)(50,000) – 600,000](0.78) + 0.22($62,500)
	= $91750
	So, the change in NPV for every unit change in sales is:
	∆NPV/∆S = ($130750 – 91750)/(25 – 26)
	∆NPV/∆S = -$39000
	If variable costs decrease by $1 then, OCF would increase by$39,000