We are evaluating a project that costs $1,120,000, has a ten-year life, and has
ID: 2477911 • Letter: W
Question
We are evaluating a project that costs $1,120,000, has a ten-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 64,000 units per year. Price per unit is $50, variable cost per unit is $25, and fixed costs are $620,000 per year. The tax rate is 35 percent, and we require a return of 12 percent on this project.
We are evaluating a project that costs $1,120,000, has a ten-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 64,000 units per year. Price per unit is $50, variable cost per unit is $25, and fixed costs are $620,000 per year. The tax rate is 35 percent, and we require a return of 12 percent on this project.
We are evaluating a project that costs $1,120,000, has a ten-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 64,000 units per year. Price per unit is $50, variable cost per unit is $25, and fixed costs are $620,000 per year. The tax rate is 35 percent, and we require a return of 12 percent on this project a-1 Calculate the accounting break-even point. (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.) Break-even point units a-2 What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.) DOL b-1 Calculate the base-case cash flow and NPV(Do not round intermediate calculations. Round your cash flow answer to the nearest whole number, e.g., 32. Round your NPV answer to 2 decimal places, e.g., 32.16.) 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 2 decimal places, e.g., 32.16.) ANPVIAGQ c. What is the sensitivity of OCF to changes in the variable cost figure? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.)Explanation / Answer
Answer: a-1
Accounting break even point = (FC + Depreciation per year)/(SP per unit - VC per unit)
= [620000+(1120000/10)]/($50 - $25) = 29280 units
Answer: a-2
At BEP, the OCF is equal to depreciation, so the DOL at the accounting breakeven is:
DOL = 1+(FC/OCF)
DOL = 1+(FC/Depreciation)
DOL = 1+(620000/112000) = 1+5.536 = 6.536
Answer: b-1
We will use the tax-shield approach to calculate the OCF. The OCF is:
OCFbase = [(P - V)Q - FC] ( 1-T) + TD
OCFbase =[(50 - 25)64000 - 620000] ( 1-0.35) + 0.35* 112000
OCFbase =[980000*0.65] + 39200
OCFbase =$676200
Now, we can calculate the NPV using our base case projections. There is no salvage value or NWC, so the NPV is:
NPVbase = -1120000 + 676200(PVIFA 12%,10)
NPVbase = -1120000+676200 * 5.6497
NPVbase = $2700327.14
Answer: b-2
To calculate the sensitivity of the NPV to changes in quantity sold, we will calculate the NPV at different quantity. We will use sales of 70000 units. The NPV at this sales level is:
OCFnew =[(50 - 25)70000 - 620000] ( 1-0.35) + 0.35* 112000
OCFnew = 734500+ 39200 = $773700
And the NPV is:
NPVnew = -1120000 + 773700(PVIFA 12%,10)
NPVnew = -1120000+773700 * 5.6497
NPVnew = $3251172.89
So, the change in NPV for every unit change in sales is:
Change in NPV/Change in sales = ($2700327.14 - $3251172.89)/(64000 - 70000)
= 550845.75/6000 = $91.81
Answer: c
To calculate the sensitivity of the OCF to changes in variable cost, we will calculate the OCF at different variable costs. We will take the variable cost at $26per unit. This is hypothetical figure, you can take any figure as the answer would be the same.
So, using the tax shield approach, the OCF at variable cost of $26 per unit is:
OCFnew = [(50 - 26)64000 - 620000] ( 1-0.35) + 0.35* 112000
OCFnew = 595400 + 39200 = $634600
So, the change in OCF is:
Change in OCF/ Change in VC = (676200 - 634600)/(25 - 26)
=41600/(-1) = -$41600
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.