A project currently generates sales of $11.8 million, variable costs equal to 50
ID: 2740439 • Letter: A
Question
A project currently generates sales of $11.8 million, variable costs equal to 50% of sales, and fixed costs of $4 million. The firm’s tax rate is 50%.
a-1.
What is the effect on project NPV, if sales increase from $11.8 million to $13.2 million? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)
a-2.
What is the effect on project NPV, if variable costs increase to 60% of sales? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. Enter your answer as the absolute value of the change.)
b.
If project NPV under the base-case scenario is $4 million, how much can fixed costs increase before NPV turns negative? (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round you answer to the nearest dollar amount.)
A project currently generates sales of $11.8 million, variable costs equal to 50% of sales, and fixed costs of $4 million. The firm’s tax rate is 50%.
The project will last for 10 years. The discount rate is 10%.Explanation / Answer
a.1. $ Mn Present contribuion 11.8*50% 5.900 New Contribution 13.2*50% 6.600 Inremental Contribution 0.700 Less: Tax @ 50% 0.350 Net inremental income 0.350 change in cash flow per year 0.350 Annuity factor for 10years @ 10% 6.145 NPV will increase by 2.151 a. 2 Present contribuion 11.8*50% 5.900 New Contribution 11.8*40% 4.720 Inremental Contribution -1.180 Less: Tax @ 50% -0.590 Net inremental income -0.590 Change in cash flow per year -0.590 Annuity factor for 10years @ 10% 6.145 NPV will decrease by 3.626 b. If project NPV under base case scenario is 4 Annuity factor for 10years @ 10% 6.145 Annualised value of NPV of $4 Mn over 10years at 10% 0.651 Before tax value of above 1.302
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