We are evaluating a project that costs $727,000, has an 12-year life, and has no salvage value. Assume that depreciation is straight-line to zero over
We are evaluating a project that costs $727,000, 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 150,000 units per year. Price per unit is $38, variable cost per unit is $22, and fixed costs are $740,086 per year. The tax rate is 33 percent, and we require a 16 percent return on this project. |
Requirement 1: Break-Even |
(a) | Calculate the accounting break-even point. (Do not round your intermediate calculations.) |
(Click to select) 48,255 units 50,042 units 48,942 units 46,255 units 51,042 units |
(b) | What is the degree of operating leverage at the accounting break-even point? (Do not round your intermediate calculations.) |
(Click to select) 13.316 13.216 1.182 13.116 1.085 |
Requirement 2: Base-Case & NPV Sensitivity |
(a) | Calculate the base-case operating cash flow. (Do not round your intermediate calculations.) |
(Click to select) $1,132,135 $537,780 $1,112,135 $1,152,135 $527,780 |
(b) | Calculate the base-case NPV. (Do not round your intermediate calculations.) |
(Click to select) $527,780 $5,156,826 $5,146,826 $537,780 $5,166,826 |
(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.) |
(Click to select) 1.621 55.613 34.685 4.421 55.813 |
(d) | Based on this sensitivity, what is the change in NPV (in dollars) if there is a 11 percent decrease in projected sales? (Do not round your intermediate calculations.) |
(Click to select) $526,780 $919,264 -$-387 -$919,264 -$527,780 |
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.) |
(Click to select) -1.95 -1,020 32,980 -25,002 980 |
(b) | Based on this sensitivity, estimate the change in OCF (in dollars) given a 12% decrease in the variable costs? (Do not round your intermediate calculations.) |
(Click to select) $51,042 $1,023 $-977 $52,042 $265,320 |
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