Question
1. The SuperBig Co. is considering a new project. The project will cost $2.4 million with an estimated life of 6 years. Straight line depreciation
1. The SuperBig Co. is considering a new project. The project will cost $2.4 million with an estimated life of 6 years. Straight line depreciation will used and no salvage value is expected. Sales are projected at 108,000 units per year. Price per unit is $78 and variable cost is $41. Fixed costs are $850,000. The tax rate is 30% and the required return is 14%.
Calculate the base-case cashflow and NPV. What is the sensitivity of NPV to changes in sales? What is the sensitivity of OCF to changes in variable costs? What would the new OCF be? If there were a $2.25 decrease in variable costs per unit, what would the new expected OCF be?
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