Question

We are evaluating a project that costs $1,920,000, has a 6-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 94,500 units per year. Price per unit is $38.43, variable cost per unit is $23.60, and fixed costs are $839,000 per year. The tax rate is 23 percent, and we require a return of 10 percent on this project. a. Calculate the base-case operating cash flow and NPV. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. 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.) c. If there is a 250-unit decrease in projected sales, how much would the NPV change? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d. 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.) e. If there is a $1 decrease in estimated variable costs, how much would the OCF change? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

G3 x H PBT 3 4 for --M2/6 A B C D E F G Sales Variable Contribution Fixed Deprecia 1 Year units price cost per unit costs tion 2 0 1 ] 94,500 $ 38.43 $ 23.60 $ 14.83 | 839,000 | 320,000 2 1 94,500 $ 38.43 $ 23.60 $ 14.83 | 839,000 320,000 5 394,500 $ 38.43 $ 23.60 $ 14.83 839,000 320,000 6 4 94,500 $ 38.43 $ 23.60 $ 14.83 839,000 320,000 7 5 94,500 $ 38.43 $ 23.60 $ 14.83 839,000 320,000 8 6 94,500 $ 38.43 $ 23.60 $ 14.83 839,000 320,000 9 242,435 242,435 242,435 242,435 242,435 242,435 I J K L M N O P Depreciat Operating Total cash Tax@23% PAT ion cash flows Investment flows PVIF@10% Present value (1,920,000) (1,920,000) 1.000 $ (1,920,000.00) 55,760 | 186,675 | 320,000 506,675 506,675 0.909 $ 460,613.59 55,760 | 186,675 | 320,000 506,675 506,675 0.826 $ 418,739.63 55,760 186,675 320,000 506,675 506,675 0.751 $ 380,672.39 55,760 186,675 320,000 506,675 506,675 0.683 $ 346,065.81 55,760 186,675 320,000 506,675 506,675 0.621 $ 314,605.28 55,760 186,675 320,000 506,675 506,675 0.564 $ 286,004.80 Base case NPV $ 286,701.50 Sales PBT Tax@23% PAT Variable Contribution Fixed Deprecia 12 Year units price cost per unit costs tion 13 0 14 1] 94,250 $ 38.43 $ 23.60 $ 14.83 839,000 320,000 15 2 94,250 $ 38.43 $ 23.60 $ 14.83 839,000 320,000 16 394,250 $ 38.43 $ 23.60 $ 14.83 839,000 320,000 17 4 94,250 $ 38.43 $ 23.60 $ 14.83 839,000 320,000 18 5 94,250 $ 38.43 $ 23.60 $ 14.83 839,000 320,000 19 6 94,250 $ 38.43 $ 23.60 $ 14.83 839,000 320,000 238,728 238,728 238,728 238,728 238,728 238,728 54,907 | 183,820 54,907 183,820 54,907 183,820 54,907 183,820 54,907183,820 54,907 183,820 Depreciat Operating Total cash ion cash flows Investment flows PVIF@10% Present value (1,920,000) (1,920,000) 1.000 $ (1,920,000.00) 320,000 503,820 503,820 0.909 $ 458,018.34 320,000 503,820 503,820 0.826 $ 416,380.31 320,000 503,820 503,820 0.751 $ 378,527.55 320,000 503,820 503,820 0.683 $ 344,115.96 320,000 503,820 503,820 0.621 $ 312,832.69 320,000 503,820 503,820 0.564 $ 284,393.35 20 NPV with decreased Qty $ 274,268.21 23 Base-case OCF 24 Base-case NPV 25 NPV Sensitivity 26 NPV change 27 OCF Sensitivity 28 OCF change $ 506,675 $ 286,701.50 $ 24.867 -$12,433.29 -$74,655 $ 74,655

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