Question
3. We are evaluating a project that costs $786,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero
3. We are evaluating a project that costs $786,000, 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 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%, and we require a return of 10% on this project.
a. Calculate the base-case cash flow and NPV.
b. What is NPV if sales increase 500 units in the quantity sold per year? What is the sensitivity of NPV to changes in the quantity sold (i.e. NPV/Q)? If sales decrease 500 units in the quantity sold per year, how much will NPV decrease?
c. What is the sensitivity of OCF to changes in the variable cost per unit (i.e. OCF/v) by assuming $1 decrease in variable cost per unit?
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