Question
We are evaluating a project that costs $738,000, has an 7-year life, and has no salvage value. Assume that depreciation is straight-line to zero over
We are evaluating a project that costs $738,000, has an 7-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 98,000 units per year. Price per unit is $36, variable cost per unit is $22, and fixed costs are $739,476 per year. The tax rate is 34 percent, and we require a 12 percent return on this project.
Requirement 1: Break-Even |
(a) | Calculate the accounting break-even point. (Do not round your intermediate calculations.) options: 60,350 units; 52,820;54,820; 61,350; 59,250 |
(b) | What is the degree of operating leverage at the accounting break-even point? (Do not round your intermediate calculations.) options: 1.243; 8.014; 8.114; 1.143; 7.914 |
Requirement 2: Base-Case & NPV Sensitivity |
(a) | Calculate the base-case operating cash flow. (Do not round your intermediate calculations.) options: 473, 312; 433, 312; 453,312; 189,213; 179,213 |
(b) | Calculate the base-case NPV. (Do not round your intermediate calculations.) options: 1,340,804; 1,330,804; 189,213; 179,213; 1,320,804 |
(c) | What is the sensitivity/elasticity of NPV to changes in the sales figure? options: 3,105; 5,905; 42,269; 42,069; 13,922 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.) |
(d) | Based on this sensitivity, what is the change in NPV (in dollars) if there is a 8 percent decrease in projected sales? (Do not round your intermediate calculations.) options: -330,606; -179,213; 178,213; -663; 330,606 |
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.) options: -25,003; 32,979; -3.14; 969; -1,031 |
(b) | Based on this sensitivity, estimate the change in OCF (in dollars) given a 13% decrease in the variable costs? (Do not round your intermediate calculations.) options: 184,985; -959, 62,350; 61,350; 1,041 |
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