We are evaluating a project that costs $929,000, has an nine-year life, and has

Question

We are evaluating a project that costs $929,000, has an nine-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 89,000 units per year. Price per unit is $37, variable cost per unit is $26, and fixed costs are $934,574 per year. The tax rate is 31 percent, and we require a 18 percent return on this project. a. The accounting break-even point is ???units. (Round your answer to the nearest whole number. (e.g., 32)) b. The base-case cash flow is $??? and NPV is $ ???. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16)) The sensitivity of NPV to changes in the sales figure is $ ???. (Do not include the dollar sign ($). Round your answer to 3 decimal places. (e.g., 32.161)) If there is a 500-unit decrease in projected sales, we would expect the NPV to change by $ ???. (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16)) c. The sensitivity of OCF to changes in the variable cost figure is $ ???. Therefore, a $1 decrease in estimated variable costs results in a $??? change in OCF. (Do not include the dollar signs ($). Negative amount should be indicated by a minus sign. Round your answers to the nearest whole number. (e.g., 32))

Explanation / Answer

(a) We rst need to compute depreciation: D = 929,000 / 9 = 103222.222 Now, the accounting break-even is Q = (FC + D) / (P - VC) = (934,574 + 103222.222) / (37 - 26) = 94345.11 (b) To get the base case NPV, rst nd the OCF: OCF = (Sales - Costs) x (1 - T) + Depr x T = (3,293,000 - 2,314,000 - 934,574) x .69 + 112,000 x .31 = 65373.94

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