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 $860,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on this project.

   

What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your final answer to 3 decimal places (e.g., 32.161).)

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

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 and round your final answer to nearest whole number (e.g., 32).)

A

What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your final answer to 3 decimal places (e.g., 32.161).)

Explanation / Answer

higher sales will make more addition to NPV and there will be a positive and direct proportionate relation between sales and NPV

2.

if sales are dropped by 500 units

3.

Cost of the project($) = 650000 Sales (units) = 47000 Price per unit = 56 Variable cost = 26 Fixed Cost = 8,60,000 Year 1 Year 2 Year 3 Year 4 Year 5 Sales in units 47000 47000 47000 47000 47000 Price Per unit 56 56 56 56 56 Variable cost per unit 26 26 26 26 26 Fixed cost 860000 860000 860000 860000 860000 Depreciation 130000 130000 130000 130000 130000 EBIT 420000 420000 420000 420000 420000 Net income after tax   273000 273000 273000 273000 273000 OCF 403000 403000 403000 403000 403000 Present value of OCF = 1527687.07 NPV of the project = 877687.07 NPV / Quantity of sales = 18.67419

higher sales will make more addition to NPV and there will be a positive and direct proportionate relation between sales and NPV

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.