Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

We are evaluating a project that costs $925,000, has a nine-year life, and a salvage value of $115,000. Assume a straight-line depreciation over the life

We are evaluating a project that costs $925,000, has a nine-year life, and a salvage value of $115,000. Assume a straight-line depreciation over the life of the project. Sales are projected at 55,000 units per year, price per unit is $63, variable costs per unit is $37, and fixed costs are $850,000 a year. The tax rate is 21% and we require a return of 10% on this project.

a) 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?

b) Suppose the projections given in price, quantity, sales figure, and fixed and variable costs, are all accurate within 10%. Calculate the best-case and worst-case NPV figures.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Quantum Economics And Finance

Authors: David Orrell

3rd Edition

1916081630, 978-1916081635

More Books

Students also viewed these Finance questions