We are evaluating a project that costs $650,000, has a five-year life, and has n

Question

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 32500 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.) $412750 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 decreaseby 6960.7 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)

Explanation / Answer

B1

$      412,750.00

b1.

NPV = PV of OCF - Initial Investment

NPV = $412,750 * PVaf(10%,5Years) - 650,000

NPV = $412,750*3.7908 - 650,000

NPV = $914,653

B2)

Let the change be such that it will bring the NPV to 0.

Hence Senstivity of NPV to sales quantity = $914,653 / 47,000 units i.e. $19.461

C)

Let the change in OCF be such that it will bring ocf to 0.

Hence senstivity of OCf in respect to variable cost = $412,750 / $1,222,000 i.e. $0.338

PARTICULARS AMOUNT Selling price/per unit $                56.00 variable cost/per unit $                26.00 Contribution/per unit $                30.00 Total Contribution $ 1,410,000.00 Fixed cost $      845,000.00 EBIT $      565,000.00 Depreciation $      130,000.00 PBT $      435,000.00 Tax $      152,250.00 PAT $      282,750.00 Depreciation $      130,000.00 OCF

$      412,750.00

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