We are evaluating a project that costs $848,000, has an eight-year life, and has
ID: 2707676 • Letter: W
Question
We are evaluating a project that costs $848,000, has an eight-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 62,000 units per year. Price per unit is $40, variable cost per unit is $20, and fixed costs are $625,000 per year. The tax rate is 35 percent, and we require a 20 percent return on this project.
I NEED THE FOLLOWING:
-ACCOUNTING BREAK EVEN POINT
-the degree of operating leverage at the accounting break-even point
-Calculate the base-case cash flow and NPV
-What is the sensitivity of NPV to changes in the sales figure?
-What is the sensitivity of OCF to changes in the variable cost figure?
We are evaluating a project that costs $848,000, has an eight-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 62,000 units per year. Price per unit is $40, variable cost per unit is $20, and fixed costs are $625,000 per year. The tax rate is 35 percent, and we require a 20 percent return on this project.
I NEED THE FOLLOWING:
-ACCOUNTING BREAK EVEN POINT
-the degree of operating leverage at the accounting break-even point
-Calculate the base-case cash flow and NPV
-What is the sensitivity of NPV to changes in the sales figure?
-What is the sensitivity of OCF to changes in the variable cost figure?
Explanation / Answer
CF0 = -724,000
EBIT = 90,000 [ $43 - $29 ] - $780,000
EBIT = 90,000 [ $14 ] - $780,000
EBIT = $1,260,000 - $780,000
EBIT = $480,000
After Tax FCF = $480,000 (1 - 35%)
After Tax FCF = $480,000 (65%)
After Tax FCF = $480,000 (0.65)
After Tax FCF = $312,000
Free Cash Flows
CF0 = -724,000
CF1 - CF8 = $312,000
WACC = 15%
NPV = $-724,000 + [$312,000] PVIFA[15%,8]
PVIFA[15%,8] = [1 - (1+15%)^-8]/15%
PVIFA[15%,8] = [1 - (1.15)^-8]/0.15
PVIFA[15%,8] = [1 - 0.3269]/0.15
PVIFA[15%,8] = [0.6731]/0.15
PVIFA[15%,8] = 4.487322
NPV = $-724,000 + [$312,000] x 4.487322
NPV = $-724,000 + $1,400,044
NPV = $676,044
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.