Question

We are evaluating a project that costs $604,000, has an 8 year life, and has no salvage value. Assume that depreciation is straight-line to zero of the life of the project. Sales are projected at 55,000 units per year. Price per unit is $36, variable cost per unit is $17, and fixed cost are 685,000 per year. The tax rate is 21 percent and we require a return of 15 percent on this project.

a. Calculate 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 costs figure? Explain what your answer tells you about a $1 decrease in estimated variable cost.

In the previous problem, suppose the projections given for price, quantity, variable costs, fixed cost are all accurate to within plus or minus 10 percent. calculate the best-case and worst-case NPV figures.

Answer 1