Question

We are evaluating a project that costs $690,000, 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 71,000 units per year. Price per unit is $75, variable cost per unit is $50, and fixed costs are $790,000 per year. The tax rate is 35 percent, and we require a return of 15 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.) 37120 units Break-even point 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.) $ Cash flow 688550 1618126.39 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.) ΔΝPV/Δ 54.47 c. What is the sensitivity of OCF to changes in the variable cost figure? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) $ ΔOCF/ΔVC

Answer 1

Break even point = [fixed cost + depreciation]/(saleprice-variable cost) = 37,120 Units (790000+138000)/(75-50) OCF base = [(P-v)Q-FC](1 - 1) + TD = $688,550 ((75-50) *(71000)-790000)*(0.65)+0.35*(138000) NPV = OCF X (PVIFA 15%,5Years ] - initial cost = $1,618,126.39 688550 x [PVIFA 15%,5Years ] - 690000 b-2Y NPV when units = 71001 units OCF = [(P-V)Q-FC](1 -T) + TD $688,566 ((75-50)"(71001)-790000)*(0.65)+0.35"(138000) NPV = OCF x [PVIFA 15%,5Years ] - initial cost = $1,618,180.87 688566 x [PVIFA 15%,5Years ] - 690000 ANPV/AQ = $54.47 [(1618180.87-1618126.39]

C) NPV when variable cost decrease by $1 OCF = [P-V)Q-FC](1 - 1) + TD = $734,700 ((75-49) *(71000)-790000)*(0.65)+0.35*(138000) AOCF/AVC = -$46,150 [(734700-688550)/(49-50)]