Question

We are evaluating a project that costs $588,000, 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 $70,000 units per year. Price per unit is $36, variable cost per unit is $20, and fixed costs are $695,000 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.

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 the a 500-unit decrease in projected sales.

c. 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.

Answer 1

Project Cost	588,000.00	(In $)
Sales	70,000
Price Per Unit	36.00	(In $)
Variable Cost	20.00	(In $)
Fixed Cost	695,000.00	(In $)
Tax rate	35%
Sales Income	2,520,000.00
Total Cost	2,095,000.00
Net Income (Per Year)	425,000.00
Period	0	1	2	3	4	5	6	7	8
Project Cost	(588,000.00)	425,000	425,000	425,000	425,000	425,000	425,000	425,000	425,000
NPV	$382,385.43
Break Even Point	1.384

A. From The above Calculation table:

Break Even Point: Project Cost/Net Income Per Year= 1.384 Years

B. NPV calculates the net present value (NPV) of an investment using a discount rate and a series of future cash flows. The discount rate is the rate for one period, assumed to be annual.

NPV: $ 382,385.43

When decreasing of Sales Unit of 500, The NPV decreased to $366,988.90 as the NET Income decreased per year i.e. $417,000.

Now, Break Even Point is 1.410 Years.

C. When Variable cost decreases by $1. There are following calculations:

Project Cost	588,000.00	(In $)
Sales	70,000	69,500
Price Per Unit	36.00	(In $)
Variable Cost	19.00	(In $)
Fixed Cost	695,000.00	(In $)
Tax rate	35%
Sales Income	2,520,000.00
Total Cost	2,025,000.00
net Income (Per Year0	495,000.00
Period	0	1	2	3	4	5	6	7	8
Project Cost	(588,000.00)	495,000	495,000	495,000	495,000	495,000	495,000	495,000	495,000
NPV	$517,105.12
Break Even Point	1.188