We are evaluating a project that costs $784,000, has a twelve-year life, and has

Question

We are evaluating a project that costs $784,000, 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 94,000 units per year. Price per unit is $35, variable cost per unit is $21, and fixed costs are $788,704 per year. The tax rate is 36 percent, and we require a 14 percent return on this project.

a. The accounting break-even point is . . . units. The degree of operating leverage at the accounting break-even point is . . .

b. The base-case cash flow is $ . . .  and NPV is $ . . . The sensitivity of NPV to changes in the sales figure is $ . . . If there is a 500-unit decrease in projected sales, we would expect the NPV to change by $ . . .

c. The sensitivity of OCF to changes in the variable cost figure is $ . . . Therefore, a $1 decrease in estimated variable costs results in a $ . . . change in OCF

We are evaluating a project that costs $784,000, 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 94,000 units per year. Price per unit is $35, variable cost per unit is $21, and fixed costs are $788,704 per year. The tax rate is 36 percent, and we require a 14 percent return on this project.

a. The accounting break-even point is . . . units. The degree of operating leverage at the accounting break-even point is . . .

b. The base-case cash flow is $ . . .  and NPV is $ . . . The sensitivity of NPV to changes in the sales figure is $ . . . If there is a 500-unit decrease in projected sales, we would expect the NPV to change by $ . . .

c. The sensitivity of OCF to changes in the variable cost figure is $ . . . Therefore, a $1 decrease in estimated variable costs results in a $ . . . change in OCF

Explanation / Answer

Cash Inflow: Sales Units 94000 Price $35 Variable cost $21 Contribution $14 Contribution value $1,316,000 Fixed cost $788,704 Profit $527,296 Tax @ 36% $189,826.56 Profit after tax $337,469.44 PV factor @ 14% for 12 years 5.66 Present value of cash flows $1,910,077.03 Cash outflow $784,000 NPV $1,126,077.03

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