Question

We are evaluating a project that costs $848,000, 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 62,000 units per year. Price per unit is $40, variable cost per unit is $24, and fixed costs are $636,000 per year. The tax rate is 24 percent, and we require a return of 20 percent on this project.

a.	Calculate the accounting break-even point. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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.)
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.)
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.)
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.)

Answer 1

			Project Cost =	$                            848,000
			Life =	8 Years
			Sales =	62,000 U X $ 40/-
			Variable Cost=	$                                      24
			Fixed Cost =	$ 636,000 p.a
			tax =	24%
			Ke =	20%
			Depriciation p.a =	$                            106,000
			(Project Cost / Life )
	a.	Accounting Break Even Point
				Fixed Costs
				Contribution Margin P.U
			=	$                            636,000
				($ 40 - $ 24 )
			=	39,750	Units