Question

We are evaluating a project that costs $800,000, 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 60,000 units per year. Price per unit is $40, variable cost per unit is $20, and fixed costs are $800,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on this project.

a-1	Calculate the accounting break-even point. (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.)

  

Break-even point

units

   

a-2	What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)

   

DOL

   

b-1	Calculate the base-case cash flow and NPV. (Do not round intermediate calculations. Round your cash flow answer to the nearest whole number, e.g., 32. Round your NPV answer to 2 decimal places, e.g., 32.16.)

  

Cash flow	$
NPV	$

b-2	What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

ΔNPV/ΔQ

$

  

c.	What is the sensitivity of OCF to changes in the variable cost figure? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32. )

  

ΔOCF/ΔVC

$

Answer 1