Question 2:
If we consider the effect of taxes, then the degree of operating leverage can be written as: DOL = 1 + [FC *(1-TO-Tex DJ/OCF Consider a project to supply Detroit with 26,000 tons of machine screws annually for automobile production. You will need an initial $5.900,000 Investment in threading equipment to get the project started, the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,425,000 and that variable costs should be $270 per ton, accounting will depreciate the initial fixed asset Investment straight-line to zero over the 6-year project life. It also estimates a salvage value of $800,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $386 per ton. The engineering department estimates you will need an initial net working capital Investment of $570,000. You require a return of 9 percent and face a tax rate of 21. a. What is the percentage change in OCF If the units sold changes to 27,000? (Do not round Intermediate calculations and enter your answer as a percent rounded to 4 decimal places, e.g., 32.1616.) b. What is the DOL at the base-case level of output? (Do not round Intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) a. Change in OCF b. DOL You are considering a new product launch. The project will cost $2,175,000, have a four- year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 260 units per year, price per unit will be $19,300, variable cost per unit will be $12,950, and fixed costs will be $650,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 24 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? (A negative answer should be Indicated by a minus sign. Do not round Intermediate calculations. Round your NPV answers to 2 decimal places, e.g., 32.16. Round your other answers to the nearest whole number, e.g. 32.) Unit Sales NPV Scenario Base Best 260 Answer is not complete. Variable Cost Fixed Costs s 12,950 650,000 585,000 715,000 286 Worst 234 b. c. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. (A negative answer should be indicated by a minus sign. Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) What is the cash break-even level of output for this project (Ignoring taxes)? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) d-1. What is the accounting break-even level of output for this project? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d-2. What is the degree of operating leverage at the accounting break-even point? (Do not round Intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) Answer is not complete. b. ANPVIAFC Cash break-even C. Accounting break-even 1. d- 2. Degree of operating leverage
