Item$11$

$14$

points

eBookPrintReferencesItem $11$

We are evaluating a project that costs $$915,000,$ has an $12-$year life, and has no salvage value. Assume that depreciation is straight$-$line to zero over the life of the project. Sales are projected at $144,000$ units per year. Price per unit is $$43,$ variable cost per unit is $$20,$ and fixed costs are $$927,810$ per year. The tax rate is $36$ percent, and we require a $11$ percent return on this project.

Requirement $1$: Break$-$Even

$($a$)$ Calculate the accounting break$-$even point. $($Do not round your intermediate calculations.$)$

$43,655$ units

$($b$)$

What is the degree of operating leverage at the accounting break$-$even point? $($Do not round your intermediate calculations.$)$

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Requirement $2$: Base$-$Case & NPV Sensitivity

$($a$)$ Calculate the base$-$case operating cash flow. $($Do not round your intermediate calculations.$)$

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$($b$)$ Calculate the base$-$case NPV$.($Do not round your intermediate calculations.$)$

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$($c$)$

What is the sensitivity$/$elasticity of NPV to changes in the sales figure?

Recall from your economics class that an elasticity measures a percentage change in one variable due to a percentage change in another. So simply increase sales quantity by $1$ percent, calculate the new NPV$,$ and then calculate the percentage change in the NPV$.($Do not round your intermediate calculations.$)$

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$($d$)$

Based on this sensitivity$,$ what is the change in NPV $($in dollars$)$ if there is a $9$ percent decrease in projected sales? $($Do not round your intermediate calculations.$)$

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Requirement $3$: Sensitivity of OCF

$($a$)$

In addition to NPV$,$ we can calculate the sensitivity of other things, such as OCF. What is the sensitivity of base$-$case OCF to changes in the variable cost? Estimate the sensitivity by increasing variable costs by $10\%.($Do not round your intermediate calculations.$)$

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$($b$)$

Based on this sensitivity$,$ estimate the change in OCF $($in dollars$)$ given a $7\%$ decrease in the variable costs? $($Do not round your intermediate calculations.$)$

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