1. Calculating Costs and Break-Even [LO3] Night Shades, Inc. (NSI), manufac- tures biotech sunglasses. The variable materials cost is $11.13 per unit, and the vari- able labor cost is $7.29 per unit. a. What is the variable cost per unit? b. Suppose the company incurs fixed costs of $875,000 during a year in which total production is 190,000 units. What are the total costs for the year? c. If the selling price is $44.99 per unit, does the company break even on a cash basis? If depreciation is $435,000 per year, what is the accounting break-even point? 2. Computing Average Cost [LO3] K-Too Everwear Corporation can manufacture mountain climbing shoes for $33.18 per pair in variable raw material costs and $24.36 per pair in variable labor expense. The shoes sell for $170 per pair. Last year, production was 145,000 pairs. Fixed costs were $1,750,000. What were total produc- tion costs? What is the marginal cost per pair? What is the average cost? If the com- pany is considering a one-time order for an extra 5,000 pairs, what is the minimum acceptable total revenue from the order? Explain. 3. Scenario Analysis [LO2] Sloan Transmissions, Inc., has the following estimates for its new gear assembly project: Price $1,440 per unit; variable costs = $460 per unit: fixed costs = $3.9 million; quantity 85,000 units. Suppose the company believes all of its estimates are accurate only to within +15 percent. What values should the company use for the four variables given here when it performs its best- case scenario analysis? What about the worst-case scenario? = 5. Sensitivity Analysis and Break-Even [LO1, 3] We are evaluating a project that costs $786,000, has an eight-year life, and has no salvage value. Assume that de- preciation is straight-line to zero over the life of the project. Sales are projected at 65,000 units per year. Price per unit is $48, variable cost per unit is $25, and fixed costs are $725,000 per year. The tax rate is 22 percent, and we require a return of 10 percent on this project. a. Calculate the accounting break-even point. What is the degree of operating lever- age at the accounting break-even point? Chapter 11 Project Analysis and Evaluation b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quantity sold? Explain what your answer tells you about a 500-unit decrease in the quantity sold. c. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs. 6. Scenario Analysis (L02] In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +10 per- cent. Calculate the best-case and worst-case NPV figures. a 9. Calculating Break-Even [LO3] A project has the following estimated data: Price = $62 per unit; variable costs = $28 per unit; fixed costs = $27,300; required return = 12 percent; initial investment $34,800; life = four years. Ignoring the effect of taxes, what is the accounting break-even quantity? The cash break-even quantity? The financial break-even quantity? What is the degree of operating leverage at the financial break-even level of output? doto. A a 16. Break-Even Intuition [LO3] Consider a project with a required return of R percent that costs $/ and will last for N years. The project uses straight-line depreciation to zero over the N-year life; there is no salvage value or net working capital requirements. a. At the accounting break-even level of output, what is the IRR of this project? The payback period? The NPV? b. At the cash break-even level of output, what is the IRR of this project? The pay- back period? The NPV? c. At the financial break-even level of output, what is the IRR of this project? The payback period? The NPV? 17. Sensitivity Analysis [L01] Consider a four-year project with the following infor- mation: Initial fixed asset investment = $575,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $29; variable costs = $19; fixed costs = $235,000; quantity sold = 76,000 units; tax rate = 21 percent. How sensitive is OCF to changes in quantity sold? 18. Operating Leverage (L04] In the previous problem, what is the degree of operat- ing leverage at the given level of output? What is the degree of operating leverage at the accounting break-even level of output? = 19. a Project Analysis [LO1, 2, 3, 4] You are considering a new product launch. The project will cost $1,950,000, have a four-year life, and have no salvage value; de- preciation is straight-line to zero. Sales are projected at 210 units per year; price per unit will be $17,500, variable cost per unit will be $10,600, and fixed costs will be $560,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 21 percent. a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within +10 percent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios? b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. c. What is the cash break-even level of output for this project (ignoring taxes)? d. What is the accounting break-even level of output for this project? What is the degree of operating leverage at the accounting break-even point? How do you interpret this number? 1. Calculating Costs and Break-Even [LO3] Night Shades, Inc. (NSI), manufac- tures biotech sunglasses. The variable materials cost is $11.13 per unit, and the vari- able labor cost is $7.29 per unit. a. What is the variable cost per unit? b. Suppose the company incurs fixed costs of $875,000 during a year in which total production is 190,000 units. What are the total costs for the year? c. If the selling price is $44.99 per unit, does the company break even on a cash basis? If depreciation is $435,000 per year, what is the accounting break-even point? 2. Computing Average Cost [LO3] K-Too Everwear Corporation can manufacture mountain climbing shoes for $33.18 per pair in variable raw material costs and $24.36 per pair in variable labor expense. The shoes sell for $170 per pair. Last year, production was 145,000 pairs. Fixed costs were $1,750,000. What were total produc- tion costs? What is the marginal cost per pair? What is the average cost? If the com- pany is considering a one-time order for an extra 5,000 pairs, what is the minimum acceptable total revenue from the order? Explain. 3. Scenario Analysis [LO2] Sloan Transmissions, Inc., has the following estimates for its new gear assembly project: Price $1,440 per unit; variable costs = $460 per unit: fixed costs = $3.9 million; quantity 85,000 units. Suppose the company believes all of its estimates are accurate only to within +15 percent. What values should the company use for the four variables given here when it performs its best- case scenario analysis? What about the worst-case scenario? = 5. Sensitivity Analysis and Break-Even [LO1, 3] We are evaluating a project that costs $786,000, has an eight-year life, and has no salvage value. Assume that de- preciation is straight-line to zero over the life of the project. Sales are projected at 65,000 units per year. Price per unit is $48, variable cost per unit is $25, and fixed costs are $725,000 per year. The tax rate is 22 percent, and we require a return of 10 percent on this project. a. Calculate the accounting break-even point. What is the degree of operating lever- age at the accounting break-even point? Chapter 11 Project Analysis and Evaluation b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quantity sold? Explain what your answer tells you about a 500-unit decrease in the quantity sold. c. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs. 6. Scenario Analysis (L02] In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +10 per- cent. Calculate the best-case and worst-case NPV figures. a 9. Calculating Break-Even [LO3] A project has the following estimated data: Price = $62 per unit; variable costs = $28 per unit; fixed costs = $27,300; required return = 12 percent; initial investment $34,800; life = four years. Ignoring the effect of taxes, what is the accounting break-even quantity? The cash break-even quantity? The financial break-even quantity? What is the degree of operating leverage at the financial break-even level of output? doto. A a 16. Break-Even Intuition [LO3] Consider a project with a required return of R percent that costs $/ and will last for N years. The project uses straight-line depreciation to zero over the N-year life; there is no salvage value or net working capital requirements. a. At the accounting break-even level of output, what is the IRR of this project? The payback period? The NPV? b. At the cash break-even level of output, what is the IRR of this project? The pay- back period? The NPV? c. At the financial break-even level of output, what is the IRR of this project? The payback period? The NPV? 17. Sensitivity Analysis [L01] Consider a four-year project with the following infor- mation: Initial fixed asset investment = $575,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $29; variable costs = $19; fixed costs = $235,000; quantity sold = 76,000 units; tax rate = 21 percent. How sensitive is OCF to changes in quantity sold? 18. Operating Leverage (L04] In the previous problem, what is the degree of operat- ing leverage at the given level of output? What is the degree of operating leverage at the accounting break-even level of output? = 19. a Project Analysis [LO1, 2, 3, 4] You are considering a new product launch. The project will cost $1,950,000, have a four-year life, and have no salvage value; de- preciation is straight-line to zero. Sales are projected at 210 units per year; price per unit will be $17,500, variable cost per unit will be $10,600, and fixed costs will be $560,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 21 percent. a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within +10 percent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios? b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. c. What is the cash break-even level of output for this project (ignoring taxes)? d. What is the accounting break-even level of output for this project? What is the degree of operating leverage at the accounting break-even point? How do you interpret this number