We are evaluating a project that costs $860,000, has a twelve-year life, and has

Question

We are evaluating a project that costs $860,000, has a twelve-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 119,000 units per year. Price per unit is $43, variable cost per unit is $26, and fixed costs are $864,300 per year. The tax rate is 34 percent, and we require a 16 percent return on this project.

Requirement 1:

Calculate the accounting break-even point.

Requirement 2:

Calculate the base-case cash flow and NPV

What is the sensitivity of NPV to changes in the sales figure?

Calculate the change in NPV If there is a 500-unit decrease in projected sales.

Requirement 3:

What is the sensitivity of OCF to changes in the variable cost figure?

Calculate the change in OCF if there is a $1 decrease in estimated variable costs.

We are evaluating a project that costs $860,000, has a twelve-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 119,000 units per year. Price per unit is $43, variable cost per unit is $26, and fixed costs are $864,300 per year. The tax rate is 34 percent, and we require a 16 percent return on this project.

Explanation / Answer

accounting break even point= $935,966/17= 55,057 units

a.cash flow = sales revenue= 119,000*43= $5,117,000

and its NPV = 119,000*17 -(1-0.3)

=$226100 and at 16% factor the value for 12 years is

=226,100*5.197= 1,175,041

NPV= 1,175,041- 860,000= $315,041

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