Question

We are evaluating a project that costs $1,180,000, 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 88,100 units per year. Price per unit is $34.80, variable cost per unit is $21.05, and fixed costs are $761,000 per year. The tax rate is 40 percent, and we require a return of 10 percent on this project 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.) Base-case operating cash flow NPV 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.) Sensitivity of NPV If there is a 500-unit decrease in projected sales, how much would the NPV drop? (Input your answer as a positive value. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV drop 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.) Sensitivity of OCF $ If there is $1 decrease in estimated variable costs, how much would the increase in OCF be? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Increase in OCF $

Answer 1

1   Base Case Operating Cash Flow & NPV      
   
   Calculation of Depreciaion      
          
   Cost of Project   $1,180,000.00   
   Life   5 Years  
   Method of Depreciaion   Streight Line to zero  
          
   Depreciation/ Year   $1,180,000.00   
       5 Years  
          
   Depreciation/ year is   $236,000.00   
          
   Working of Operating Cashflow      
          
   Expected Units Sold/ Year   88,100.00   
   Selling Price/ Unit   $34.80   
   Expected Sales/ Year   $3,065,880.00   
   Variable Cost/ Unit   $21.05   
   Variable Cost/ Year   $1,854,505.00   
          
   Sales   $3,065,880.00   
Less   Variable Cost   $1,854,505.00   
       $1,211,375.00   
Less   Fixed Cost   $761,000.00   
       $450,375.00   
Less   Depreciaion   $236,000.00   
       $214,375.00   
Less   Tax @ 40%   $85,750.00   
       $128,625.00   
Add   Depreciation    $236,000.00   
   Net Cashflow   $364,625.00   
   Cummulative Annuity Value of 10% for 5 Years   3.791     
   NPV of Cash flow   $1,382,293.38   
   Cost of Project   $1,180,000.00   
   NPV   $202,293.37      
   So Base Case Operating Cashflow   $364,625.00   
   NPV   $202,293.37   
     
2   Sensitivity of NPV to change in Sales Figure      
   Let's assume that expected units sold reduced by 5000 units      
   Expected Units Sold/ Year   83,100.00   
   Selling Price/ Unit   $34.80   
   Expected Sales/ Year   $2,891,880.00   
   Variable Cost/ Unit   $21.05   
   Variable Cost/ Year   $1,749,255.00   
          
   Sales   $2,891,880.00   
Less   Variable Cost   $1,749,255.00   
       $1,142,625.00   
Less   Fixed Cost   $761,000.00   
       $381,625.00   
Less   Depreciaion   $236,000.00   
       $145,625.00   
Less   Tax @ 40%   $58,250.00   
       $87,375.00   
Add   Depreciation    $236,000.00   
   Net Cashflow   $323,375.00   
          
   Cummulative Annuity Value of 10% for 5 Years   3.791  
   NPV of Cash flow   $1,225,914.63   
   Cost of Project   $1,180,000.00   
   NPV   $45,914.62      
   So Base Case Operating Cashflow   $323,375.00   
   NPV   $45,914.62   
   Change in NPV      
   Old NPV   $202,293.37   
   New NPV   $45,914.62   
   Change in NPV   $156,378.75   
   Sensitivity of NPV to change in Sales figures   $31.28   
          
3   If there is a 500-unit decrease in projected sales, how much would the NPV drop?      
   Sensitivity of NPV is   $31.28   
   Change in Units Sold   500   
   So drop in NPV would be    $15,637.88   
   {500 units * $ 31.28)      
          
5   If there is $1 decrease in estimated variable costs, how much would the increase in OCF be?      
              Variable Cost/ Unit   $21.05   
   Decrease   $1.00   
   Revised Variable Cost/ Unit   $20.05   
   Selling Price/ Unit   34.8  
   Expected Units Sold/ Year   88100  
          
   Sales   $3,065,880.00   
Less   Variable Cost   $1,766,405.00   
       $1,299,475.00   
Less   Fixed Cost   $761,000.00   
       $538,475.00   
Less   Depreciaion   $236,000.00   
       $302,475.00   
Less   Tax @ 40%   $120,990.00   
       $181,485.00   
Add   Depreciation    $236,000.00   
   Net Cashflow   $417,485.00   
          
4   Sensitivity of OCF to change in variable cost      
   Old OCF   $364,625.00   
   New OCF   $417,485.00   
   Sensitivity in OCF   $(52,860.00)  
   Sensitivity in OCF/ Units Sold   $(0.60)

    Cummulative Annuity Value of 10% for 5 Years   3.791  
          
   NPV of Cash flow   $1,582,685.64   
   Cost of Project   $1,180,000.00   
   NPV   $402,685.63   
Change in NPV      
   Old NPV   $202,293.37   
   New NPV   $402,685.63   
   Change in NPV   $200,392.26   
   Sensitivity of NPV to change in Sales figures   2.2746