We are evaluating a project that costs $768,000, has a six-year life, and has no
ID: 2753528 • Letter: W
Question
We are evaluating a project that costs $768,000, has a six-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 57,000 units per year. Price per unit is $60, variable cost per unit is $35, and fixed costs are $770,000 per year. The tax rate is 35 percent, and we require a return of 15 percent on this project.
Calculate the accounting break-even point. (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.)
What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)
Calculate the base-case cash flow and NPV. (Do not round intermediate calculations. Round your cash flow answer to the nearest whole number, e.g., 32. Round your NPV answer to 2 decimal places, e.g., 32.16.)
What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
a-1
Calculate the accounting break-even point. (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.)
We are evaluating a project that costs $768,000, has a six-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 57,000 units per year Price per unit is $60, variable cost per unit is $35, and fixed costs are $T70,000 per year. The tax rate is 35 percent, and we require a retum of 15 percent on this project. a-1 Calculate the accounting break-even point. (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.) Break-even point units a-2 What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.) DOL b-1 Calculate the base-case cash flow and NPV. (Do not round intermediate calculations. Round your cash flow answer to the nearest whole number, e.g., 32. Round your NPV answer to 2 decimal places, e.g., 32.16.) Cash flow NPV b-2 What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the sensitivity of OCF to changes in the variable cost figure? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.) AOCFIAVCExplanation / Answer
a-1 Selling Price 60 Variable Cost 35 Contribution 25 Accounting Break even point=Total Fixed costs/ Contribution per unit ie. 770000+ 128000(Depn.)/25= 35920 units a-2 a-2. degree of operating leverage at the accounting break-even point Contribution margin/ operating Income (at 35920 units) Sales @ $ 60 2155200 Less: Variable Costs @ $35 1257200 Contribution Margin 898000 Less :Fixed costs & depn 898000 Net income 0 Tax 0 DOL @ the accounting BEP = 1+ (Fixed costs/Operating cash flow) ie. 1+(770000/128000) 7.015625 7.02 Base case cash flow(Sales 57000 units) Annual cash flow PV F @ 15% Sales 3420000 0.869565217 Less :Variable costs 1995000 0.756143667 1425000 0.657516232 Less Fixed costs 770000 0.571753246 Less;Depn 128000 0.497176735 PBT 527000 0.432327596 Tax @ 35% 184450 3.784482694 PAT 342550 Add backtax on depn. 44800 Net annual cash flow 387350 NPV at base case(57000 units) = $ -768000+(3.78448*387350) 697918.328 697918 cash flow(Sales 50000 units) Annual cash flow PV F @ 15% Sales 3000000 0.869565217 Less :Variable costs 1750000 0.756143667 1250000 0.657516232 Less Fixed costs 770000 0.571753246 Less;Depn 128000 0.497176735 PBT 352000 0.432327596 Tax @ 35% 123200 3.784482694 PAT 228800 Add backtax on depn. 44800 Net annual cash flow 273600 NPV at sales(50000 units) = $ -768000+(3.78448*273600) 267433.728 267434 Change in NPV/Change in Sales Quantity= (697918-267434)/(57000-50000) 61.49771429 $ 61 OCF Variable costs 57000 units 387350 1995000 50000 units 273600 1750000 Change in OCF/Change in VC= (387350-273600)/(1995000-1750000) 0.464286
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