Question

We are evaluating a project that costs $520,000, has a five-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 73,000 units per year. Price per unit is $50, variable cost per unit is $30, and fixed costs are $832,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on this project.

a. calculate the break even point.

b-1. calculate the base case cash flow and NPV rounding to 2 decimal places.

b-2. what is the sensitivity of NPV to changes in the sales figure? (NPV/Q)

b-3. Calculate the change in NPV if sales were to drop by 500 units.

c. What is the sensitivity of OCF to changes in the variable cost figure? (OCF/VC)

Answer 1

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PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) View Add-Ins Review - 2x = = Dr General Σ AutoSum : A Fill 2 Sort & Wrap Text FMerce Merge & Center - Center m Find & E E s File Home Insert Page Layout Formulas Data % Cut Calibri 11AA = Ea Copy Paste BI Format Painter U D- DA E Clipboard Font F37 - for B C $ % % , 4.0 .00 :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Filter Editing Select Alignment Number Cells D 36 37 COST OF MACHINE DEPRECIATION = 520000 104000 38 39 40 41 a 42 43 44 45 b-1 46 BREAK EVEN POINT = (FIXED COSTS+ DEPRECIATION)/(SELLING PRICE- VARIABLE COST) BREAK EVEN POINT = (832000 + 104000)/(50-30) BREAK EVEN POINT = 46800 NPV AT 70000 UNITS OCF =( (sp-vc)(units) - fixed cost)(1-t) + t(depreciation) OCF =( (50-30)(73000) - 832000)(1-0.35) + (0.35)*(104000) OCF = 444600 47 48 50 51 NPV = NPV = NPV = NPV = Present value of all cash flows - investment (444600 x PVIFA @10%,5 years) - 520000 (444600 x 3.790787) - 520000 1165383.80 NOTE PVIFA @10%, 5 YEARS (1/r)*(1-(1/(1+r)^n) (1/0.10)*(1-(1/(1+0.10)^5) = 52 3.790787 53 54 H m PB ROPI APV ROSS price quote EVA MVA LEVERAGED BUY SWAP distress BRIGHAN CAP GAIN Sheet1 Sheet2 bilbo MINT Sheet4 arginal tax ferences Sheets BOJ 130% Red 0 + 6. B 9 * ENG 19-08-2019

PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) View Add-Ins Review - 2x Σ AutoSum : A = = Dr Wrap Text General File Home Insert Page Layout Formulas Data * Cut Calibri 11AA = E Copy Paste B Format Painter I U D- A E Clipboard Font H73 Fax S E E Merge & Center - $ % & ... Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format Fill 2 Clear Sort & Filter Editing Find & Select Alignment Number Cells 55 To calculate sensitivity, we have to take one more sales units let us take sales units = 75000 56 57 58 59 OCF =( (sp-vc)(units) - fixed cost)(1-t) +t(depreciation) OCF =( (50-30) (75000) - 832000)(1-0.35) + (0.35)*(104000) OCF = 470600 61 62 63 64 65 66 NPV = NPV = NPV = NPV = Present value of all cash flows - investment (470600 x PVIFA @10%,5 years) - 520000 (470600 x 3.790787) - 520000 1263944.25 67 The sensitivity of NPV to changes in units Echange in NPV/change in units The sensitivity of NPV to changes in units =(1263944.25-1165383.80)/(75000-73000) = 49.280 (ROUNDED TO 3 DECIMALSI 68 b-2 69 70 71 72 b-3 73 HOR , marginal tax Red ferences IF SALES DROP BY 500 UNITS THEN NPV WILL DECREASE BY = 24640.11 [49.280 x 500] PB ROPI APV ROSS price quote EVA MVA LEVERAGED BUY SWAP distress BRIGHAN CAP GAIN Sheeti Sheet2 bilbo MINT Sheet4 Sheetsed BOI 130% 0 _ + 03:58 19-08-2019 . E X . * ENG

PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut Calibri 11AA = = = Dr Wrap Text General Σ AutoSum : A Fill 2 Sort & m Find & B I U D- A E S E E Merge & Center - $ % & ... Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles E Copy Paste Format Painter Clipboard H91 2 Clear Filter Editing Select Alignment Number Cells Font fc 73 74 75 To calculate sensitivity with respect to variable costs, we have to take one more variable cost figure let us take variable cost = 31 OCF =( (sp-vc)(units) - fixed cost)(1-t) + t(depreciation) OCF =((50-31)(73000) - 832000)(1-0.35) + (0.35)*(104000) OCF = 397150 76 77 78 79 80 81 82 83 84 The sensitivity of OCF to changes in units =change in OCF/change in units The sensitivity of OCF to changes in units =((397150-444600)/(31-30) = -47450 85 86 87 88 89 90 91 H m PB ROPI APV ROSS price quote EVA MVA LEVERAGED BUY SWAP distress BRIGHAN CAP GAIN Sheet1 Sheet2 bilbo MINT Sheet4 arginal tax ferences Sheets BOI 130% Red 0- _ + x 9 m * OENG 19-08-2019