Question

We are evaluating a project that costs $1,080,000, has a ten-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 52,000 units per year. Price per unit is $50, variable cost per unit is $30, and fixed costs are $756,000 per year. The tax rate is 35 percent, and we require a return of 15 percent on this project.

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

Break-even point            units

b-1 Calculate the base-case cash flow and NPV. (Do not round intermediate calculations and 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 3 decimal places, e.g., 32.161.)

ΔNPV/ΔQ          $  

b-3 Calculate the change in NPV if sales were to drop by 500 units. (Enter your answer as a positive number. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV would  (Click to select)  decrease  increase  by $  

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

ΔOCF/ΔVC          $

Answer 1

a)	Accounting break even point in units = Fixed costs/Contribution margin per unit = 864000/20 =	43200	Units
b-1)	Cash flow	222400
	NPV:
	NPV = -1080000+222400*(1.15^10-1)/(0.15*1.15^10) =	$             36,174.14
b-2)	Let change in sales units be +5200 ie +10%.
	Sales (57200*50)		2860000
	Variable cost (57200*30)		1716000
	Contribution margin		1144000
	Fixed costs:
	Mfg other than depreciation	756000
	Depreciation (1080000/10)	108000	864000
	Net operating income		280000
	Tax at 35%		98000
	NOPAT		182000
	Add: Depreciation		108000
	Operating cash flow		290000
	NPV = -1080000+290000*(1.15^10-1)/(0.15*1.15^10) =	375442.90
	Change in NPV/Change in qantity = (375442.90-36174.14)/5200 =	$                   65.244
b-3)	Sales (51500*50)		2575000
	Variable cost (51500*30)		1545000
	Contribution margin		1030000
	Fixed costs:
	Mfg other than depreciation	756000
	Depreciation (1080000/10)	108000	864000
	Net operating income		166000
	Tax at 35%		58100
	NOPAT		107900
	Add: Depreciation		108000
	Operating cash flow		215900
	NPV = -1080000+215900*(1.15^10-1)/(0.15*1.15^10) =	$               3,552.15
	NPV would decrease by 36174.14-3552.15 =	$             32,621.99
c)	Variable cost increases by 10% to $33 per unit.
	Sales (52000*50)		2600000
	Variable cost (52000*33)		1716000
	Contribution margin		884000
	Fixed costs:
	Mfg other than depreciation	756000
	Depreciation (1080000/10)	108000	864000
	Net operating income		20000
	Tax at 35%		7000
	NOPAT		13000
	Add: Depreciation		108000
	Operating cash flow		121000
	Sensitivity = (121000-222400)/3 =	$           -33,800.00