Hello, I need a little help figuring out the answer to this homework problem. Ca

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Hello,

I need a little help figuring out the answer to this homework problem. Can someone help me?

Problem 9-1 Sensitivity Analysis and Break-Even Point We are evaluating a project that costs $500,000, 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 50,000 units per year. Price per unit is $40, variable cost per unit is $25, and fixed costs are $600,000 per year. The tax rate is 35 percent, and we require a return of 12 percent on this project. a. Calculate the accounting break-even point. (Do not round intermediate calculations and round your final answer to nearest whole number (e.g., 32).) Break-even point units b-1 Calculate the base-case cash flow and NPV. (Do not round intermediate calculations and round your NPV answer to 2 decimal places (e.g., 32.16).) Cash floww NPV b-2 What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your final answer to 3 decimal places (e.g., 32.161).) ANPVIAQ b-3 Calculate the change in NPV if sales were to drop by 500 units. (Enter your answer as a positive number. Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).) NPV would (Click to select) by S 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 and round your final answer to nearest whole number (e.g., 32).) AOCFIAVO

Explanation / Answer

a) Accounting break-even point = (Fixed Cost + Depreciation) / (Price - Variable Cost)

Depreciation = Investment / Life = 500,000 / 8 = 62,500

Break-even point = (600,000 + 62,500) / (40 - 25) = 44,167 units

b1) Base case cash flow = Net Income + Depreciation

Net Income = ((P - V) x Q - FC - Dep) x (1 - tax)

= ((40 - 25) x 50,000 - 600,000 - 62,500) x (1 - 35%)

= $56,875

=> Cash Flows = 56,875 + 62,500 = $119,375

NPV can be calculated using PV function in excel

N = 8, I/Y = 12%, PMT = 119,375, FV = 0

=> Compute PV = $593,012

NPV = 593,012 - 500,000 = $93,012

b2) Sensitivity of NPV to sales figure can be calculated by increasing the sales figure by 1 unit and calculating the difference of NPV.

If unit sales = 50,001 => new NPV = $93,060.43

=> Sensitivity = 93,060.43 - 93,012 = $48.43

b3) If sales by 500, NPV would decline by 500 x 48.43 = $24,217.24

c) Similarly, if VC increase by $1 to $26, Cash flow = ((40 - 26) x 50,000 - 600,000 - 62,500) x (1 - 35%) + 62,500 = $86,875

Sensitivity = 86,875 - 119,375 = -32,500

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