We are evaluating a project that costs $889,000, has an 10-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 105,000 units per year. Price per unit is $38, variable cost per unit is $26, and fixed costs are $891,667 per year. The tax rate is 38 percent, and we require a 17 percent return on this project. |
Requirement 1: Break-Even |
(a) | Calculate the accounting break-even point. (Do not round your intermediate calculations.) |
(Click to select) 80,614 units 81,714 units 74,306 units 82,714 units 76,306 units |
(b) |
What is the degree of operating leverage at the accounting break-even point? (Do not round your intermediate calculations.) |
(Click to select) 11.13 1.2 11.03 1.1 10.93 |
Requirement 2: Base-Case & NPV Sensitivity |
(a) | Calculate the base-case operating cash flow. (Do not round your intermediate calculations.) |
(Click to select) $282,148 $116,186 $242,148 $106,186 $262,148 |
(b) | Calculate the base-case NPV. (Do not round your intermediate calculations.) |
(Click to select) $116,186 $342,246 $332,246 $322,246 $106,186 |
(c) |
What is the sensitivity/elasticity of NPV to changes in the sales figure? Recall from your economics class that an elasticity measures a percentage change in one variable due to a percentage change in another. So simply increase sales quantity by 1 percent, calculate the new NPV, and then calculate the percentage change in the NPV. (Do not round your intermediate calculations.) |
(Click to select) 34.56 3.521 34.76 13.754 10.954 |
(d) |
Based on this sensitivity, what is the change in NPV (in dollars) if there is a 6 percent decrease in projected sales? (Do not round your intermediate calculations.) |
(Click to select) -$-792 -$218,358 $218,358 $105,186 -$106,186 |
Requirement 3: Sensitivity of OCF |
(a) |
In addition to NPV, we can calculate the sensitivity of other things, such as OCF. What is the sensitivity of base-case OCF to changes in the variable cost? Estimate the sensitivity by increasing variable costs by 10%. (Do not round your intermediate calculations.) |
(Click to select) -6.46 32,976 935 -25,006 -1,065 |
(b) |
Based on this sensitivity, estimate the change in OCF (in dollars) given a 8% decrease in the variable costs? (Do not round your intermediate calculations.) |
(Click to select) $82,714 $135,408 $83,714 $1,052 $-948 |
Requirement 1
a. 74306 units
b. 1.20
Project cost | 889,000.00 | ||||
Life | 10 Yrs | ||||
Sales | 105,000.00 | units | |||
Price | 38.00 | per unit | |||
Variable cost | 26.00 | per unit | |||
Fixed cost | 891,667.00 | per year | |||
Tax rate | 38.00 | % | |||
Required Return | 17.00 | % | |||
sales | v.cost | contribution | f cost | profit | |
3,990,000.00 | 2,730,000.00 | 1,260,000.00 | 891,667.00 | 368,333.00 | |
1,783,334.00 | 891,667.00 | 891,667.00 | 891,667.00 | 0.00 | |
34,294.88 | |||||
1,783,334.00 | 891,667.00 | 891,667.00 | 891,667.00 | 0.00 | |
46,929.84 | 34,294.88 | ||||
38.00 | 26.00 | 12.00 | 74,305.58 | ||
70.77 | |||||
891,667.00 | 3.42 | ||||
891,667.00 |
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