We are evaluating a project that costs $929,000, has an nine-year life, and has
ID: 2682176 • Letter: W
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.
The accounting break-even point isunits.(Round your answer to the nearest whole number. (e.g., 32))
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))
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))
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.
Explanation / Answer
We wil use Tax shield Approach to find OCF.
OCF (Base) = ((SP pu- VCpu)*Qty - FC)*(1-T) + T*Dep
So OCF (Base) = ((37-26)*89000 - 934574)*(1-31%) + 31%*(929,000/9) = 62,652.83
PV of $1 for 9 Yrs at Disc rate of 18% is 4.3030.
So NPV = - 929000 + 4.3030*62652.83 =-$659,404.87
a. The accounting break-even point is units.
Acctg BEP = (FC+Dep)/Cont pu = (934,574+103,222)/11 = 94,345 units
b. The base-case cash flow is $133,876 and NPV is-$659,404.87
To find sensitivity of NPV to changes in the sales figure, we will find NPV at a Diff Qty. We wil use Sales of 95000 units. NPV at This Level is
OCF (95000) = ($11*95000 - 934574)*(1-31%) + 31%*(929,000/9) = $108,193
And NPV is = -929000 + 4.3030*$108,193 = -$463,445,52
So Change in NPV for every units change in sales = dNPV/dSales
= (-659404.87 -(-463445.52))/(95000-89000)
= -$32.660
The sensitivity of NPV to changes in the sales figure is -$32.660.
If there is a 500-unit decrease in projected sales, we would expect the NPV to change by
= -$32.660*500 = -$16329.95
c. To find how sensitive OCF is to change in VC, we will compute OCF at VC of 25 pu.
OCF (new) = ((SP pu- VCpu)*Qty - FC)*(1-T) + T*Dep
So OCF (new) = ((37-25)*89000 - 934574)*(1-31%) + 31%*(929,000/9) = $124062.83
So Change in OCF for a $1 change in VC is = dOCF/dVC = (62652.83-124062.83)/(26-25)
= -$61,410
The sensitivity of OCF to changes in the variable cost figure is -$61,140. Therefore, a $1 decrease in estimated variable costs results in a $61140 (Increase) change in OCF.
PV of $1 for 9 Yrs at Disc rate of 18% is 4.3030.
So NPV = - 929000 + 4.3030*62652.83 =-$659,404.87
a. The accounting break-even point is units.
Acctg BEP = (FC+Dep)/Cont pu = (934,574+103,222)/11 = 94,345 units
b. The base-case cash flow is $133,876 and NPV is-$659,404.87
To find sensitivity of NPV to changes in the sales figure, we will find NPV at a Diff Qty. We wil use Sales of 95000 units. NPV at This Level is
OCF (95000) = ($11*95000 - 934574)*(1-31%) + 31%*(929,000/9) = $108,193
And NPV is = -929000 + 4.3030*$108,193 = -$463,445,52
So Change in NPV for every units change in sales = dNPV/dSales
= (-659404.87 -(-463445.52))/(95000-89000)
= -$32.660
The sensitivity of NPV to changes in the sales figure is -$32.660.
If there is a 500-unit decrease in projected sales, we would expect the NPV to change by
= -$32.660*500 = -$16329.95
c. To find how sensitive OCF is to change in VC, we will compute OCF at VC of 25 pu.
OCF (new) = ((SP pu- VCpu)*Qty - FC)*(1-T) + T*Dep
So OCF (new) = ((37-25)*89000 - 934574)*(1-31%) + 31%*(929,000/9) = $124062.83
So Change in OCF for a $1 change in VC is = dOCF/dVC = (62652.83-124062.83)/(26-25)
= -$61,410
The sensitivity of OCF to changes in the variable cost figure is -$61,140. Therefore, a $1 decrease in estimated variable costs results in a $61140 (Increase) change in OCF.
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