Question
We are evaluating a project that costs $864,000, has an eight-year life, and has no salvage. Assume that depreciation is straight-line to zero over the
We are evaluating a project that costs $864,000, has an eight-year life, and has no salvage. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 71,000 units per year. Price per unit is $49, variable cost per unit is $33, and fixed costs are $765,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on this project. a.) Calculate the accounting break-even point. What is the degree of operating leverage at the accounting break-even point? b.) Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales. c.) What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs. PLEASE SHOW ALL STEPS (Using break even method and degree of operating leverage)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started