Question

We are evaluating a project that costs $744,000, has a life of 6 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 29,000 units per year. Price per unit is $60, variable cost per unit is $20, and fixed costs are $740,000 per year. The tax rate is 23 percent and we require a return of 11 percent on this project Calculate the accounting break-even point (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) 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.) b-2. What ed а. 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.) k 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.) C. ces Break-even point units а. b-1 Cash flow NPV b-2 ANPVIAQ |ДОСFIAVC C.

Answer 1

Answer a:

Annual depreciation = (Cost - salvage value) / Useful life = (744000 - 0) / 6 = $124,000

Total Fixed costs = 740000 + 124000 = $864,000

Contribution per unit = Price - variable cost = 60 - 20 = $40

Break-even point in units = Fixed cost / Contribution per unit = 864000 /40 = 21,600 Units

Break-even point in units = 21,600 units

Answer b-1:

Year Initial Investment Year Year 1 to Year 6 ($744,000) Sales (29,000 * $60) Variable cost (29000 * $20) Fixed Cost Cash earnings before tax Tax at 23% Cash earnings after tax Depreciation Depreciation tax shield $1,740,000 ($580,000) ($740,000) $420,000 ($96,600) $323,400 ($124,000) $28,520 ($744,000) Cash flows PV factor of $1 annuity (1-1/(1+11%)^6)/11%) PV of cash flows NPV $351,920 4.2305379 $1,488,810.88 ($744,000.00) $744,810.88

Annual cash flow = $351,920

NPV = $744,810.88

Answer b-2:

Let us calculate change in NPV on increase of 1 unit of sales.

ΔNPV = (Change in sale * Contribution per unit) * (1 - tax rate) * PV of $1 annuity for 6 years at 11% rate

= 1 * 40 * (1 - 23%) * 4.2305379

= $130.301

ΔNPV / ΔQ = $130.301

Answer c:

Let us calculate change in OCF on increase of variable cost by $1

ΔOCF = (20 - 21) *29000 * (1 - tax rate) = - $22,330

ΔOCF / ΔVC = - $22,330

a. Break-even Cash Flow b-1 NPV b-2 b-2 21,600 Units $351,920 $744,810.88 $130.301 -$22,330 ANPV / AQ AOCF / AVC