Question
We are evaluating a project that costs $832,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over
We are evaluating a project that costs $832,000, 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 40,000 units per year. Price per unit is $40, variable cost per unit is $15, and fixed costs are $700,000 per year. The tax rate is 35 percent, and we require a return of 18 percent on this project.
1) Calculate the accounting break-even point.
2) What is the degree of operating leverage at the accounting break-even point?
3) Calculate the base-case cash flow and NPV.
4) What is the sensitivity of NPV to changes in the sales figure? (Delta NPV/ Delta Q)
5) What is the sensitivity of OCF to changes in the variable cost figure? (Delta OCF/Delta VC)
(The answer is #1 is 32160 units)
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