Question

Consider a three year project with an initial fixed asset investment of $583206, straight-line depreciation to zero over the lifetime of the project and no salvage value. Each item will be sold for a $74 price Variable costs are $20 for each item, and an annual fixed cost of $162680 will be incurred. The current estimate of units sold per year is 31384 units. The company has a tax rate of 40% and the discount rate is 10%. How sensitive is net present value to increase in quantity sold? That is, how much will NPV change for a 1,000 increase in quantity sold? Select one: a. $71331.42 b. $72839.60 C.$40176.00 d.$63597.01 O e. $80574.00

Answer 1

Base case Units Sales Var cost Fixed cost Depreciation EBIT Tax(40% Net income Operating Cash Flow Net Income Depreciation Operating cash flow Total Cash Flow initial cost Salavge value on equip Operating cash flow Total Cash flow NPV 0 1 2 31,384 2,322,416| 2,322,4162,322,416 627,680 627,680 627,680 162,680 162,680162,680 194,402194,402 194,402 1,337,654 1,337,6541,337,654 535,062535,062535,062 802,592 802,592 802,592 31,384 31,384 802,592802,592 802,592 194,402 194,402194,402 996,994996,994 996,994 -583,206 996,994996,994996,994 583,206996,994996,994996,994 1,896,171.51 Var cost increase by 1% Units Sales Var cost Fixed cost Depreciation EBIT Tax(35% Net income Operating Cash Flow Net Income Depreciation Operating cash flow Total Cash Flow initial cost Salavge value on equi Operating cash flow Total Cash flow NPV 0 1 2 32,384 2,396,4162,396,416 2,396,416 647,680647,680647,680 162,680 162,680162,680 194,402194,402 194,402 1,391,654 1,391,6541,391,654 556,662556,662556,662 834,992 834,992 834,992 32,384 32,384 834,992 834,992 834,992 194,402 194,402 194,402 1,029,394|1,029,3941,029,394 583,206 -1,029,3941,029,3941,029,394 583,2061,029,394| 1,029,3941,029,394 1,976,745.51 senstivity analysis NPV 80,574.00

1Base case 0 31384 C2*74 -C2 20 162680 -58320613 C3-C4-C5-C6 31384 D2 74 D2 20 162680 5832063 D3-D4-D5-D6 31384 -E2*74 E2 20 162680 -58320613 E3-E4-E5-E6 -E770.4 E7-E8 4 Var cost 5 Fixed cost 6 Depreciation 7 EBIT 9 Net income 10 Operating Cash Flow 11Net Income 2 Depreciation 13 Operating cash flow 14 Total Cash Flow 15 initial cost 16 Salavge value on equip 17 Operating cash flow 18 Total Cash flow 19NPV 20 21 Var cost increase by 1% -C7-C8 D7-D8 C11+C12 D11+D12 E11+E 12 583206 SLUMB15:B17) -B18+ NPV(10%,C18:E181 C15:C17 D15:D17 SLUME15:E17 0 23 Sales 24 Var cost 25 Fixed cost 26 Depreciation 27 EBIT 31384+1000 C22 74 -C22 20 162680 -58320613 C23-C24-C25-C26 C27*0.4 C27-C28 31384+1000 D22 74 D22 20 162680 -58320613 -D23-D24-D25-D26 -D27-0.4 D27-D28 31384+1000 -E22 74 E22 20 162680 -58320613 E23-E24-E25-E26 E27 0.4 -E27-E28 29 Net income 30 Operating Cash Flow 31 Net Income 32 Depreciation 33 Operating cash flow 34 Total Cash Flow 35 linitial cost 86 Salavge value on equip 37 Operating cash flow 38 Total Cash flow 39 NPV C29 D29 E29 C31+C32 D31+D32 -E31+E32 583206 B33 SUM(B35:B37) -B38+ NPV( 10%,C38:E38 C33 D33 C35:C37 D35:D37 SUMIE35:E37) 41 senstivity analysis NPV (B39-B19)