Question

Problem 9-1 Sensltivity Analysis and Break-Even Point We are evaluating a project that costs $650,000, 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 47,000 units per year. Price per unit is $56, variable cost per unit is $26, and fixed costs are $845,000 per year. The tax rate is 35 percent, and we require a return of 10 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.) Break-even point 32,500o 32 500 units 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.) 42150 Cash flow NPV 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.) b-3 Calculate the change in NPV if sales were to drop by 500 units. (Enter your answer as a positive number. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV would (Click to select) by S c. 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.)

Answer 1

Please refer to below spread sheet for calculations -

It is assumed that Fixed cost doesn't include depreciation.

X fC5 (1-0.35) Income Statement Quantity rate Amount (S) YEAR Cash Flows PVIAF(10%,5 PV Sales Variable cost Contribution Fixed Cost Depreciation Profit Before Tax Tax (35%) Net Income 4 47000 56 2,632,000.00 47000 26 1,222,000.00 1,410,000.00 845,000.00 130,000.00 435,000.00 152,250.00 282,750.00 0 Project Cost 650,000 650,000.00 1-5 Annual cash inflow 412,750.00 3.7908 1,564,647.24 10 12 13 Total Fixed Cost 975,000.00 Contribution per unit 30.00 15 a Break-even point 32500 unit 17 b-1 Operating Cash Inflows 18 19 20 b-2 NPV sensitivity to Sales Quantity $73.920 21 22 b-3 Sale 23 NPV 412,750.00 914,647.24 NPV s unit drop by 500 Decrease 36,960.17 25 c Sensitivity of OCF to VC 26 AOCF/AVC 27 $30,550

formula reference -

E20 MNC Income Statement Quantity -47000 Amount (S) C4 D4 Cash Flows 650000 rate YEAR | PVIAF(10%,5) PV Sales Variable cost Contribution Fixed Cost Depreciation Profit Before Tax Tax (35% Net Income Project Cost 1-5 Annual cash inflow -17 -E4-E5 45000 J4/5 E6-E7-E8 -E9*0.3S E9-E10 10 12 13 Total Fixed Cost Contribution per unit Break-even point E6/C4 -E13/E14 15 a 16 17 b-lOperating Cash Inflows 18 19 20 b-2 NPV sensitivity to Sales Quanti 21 22 b-3 Sales unit d units NPV :SUM(L4L5) D4-DS1-0.35IFKS NPV Decrease E20"500 24 25 c 26 27 Sensitivity of OCF to VC -C5(1-0.35