We are evaluating a project that costs $680,000, has a five-year life, and has n

Question

We are evaluating a project that costs $680,000, has a five-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 64,000 units per year. Price per unit is $46, variable cost per unit is $26, and fixed costs are $685,000 per year. The tax rate is 35 percent, and we require a return of 20 percent on this project.

Calculate the base-case cash flow and NPV

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

C. What is the sensitivity of OCF to changes in the variable cost figur?

b-1

Calculate the base-case cash flow and NPV

b-2

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

C. What is the sensitivity of OCF to changes in the variable cost figur?

Explanation / Answer

Answer - b1

Answer - b2

For Calculating Sensitivity assume 65000 units sold

NPV of 65000 units sold

If 1 additional unit is sold, NPV will increase by $38.88

Answer - C

For calculating sensitivity of OCF to changes in the variable cost , let us assume variable cost per unit decreased by $1

Operating Cash increases by $41600 for $1 per unit decrease in Variable Cost.

Project Cost 680000 Less: Salvage Value 0 Project Life (Years) 5 Depreciation per year(680000/5) 136000 WACC 20%

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