Question

We are evaluating a project that costs $811,000, has an 11-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 134,000 units per year. Price per unit is $43, variable cost per unit is $22, and fixed costs are $816,677 per year. The tax rate is 34 percent, and we require a 17 percent return on this project.

  

Requirement 1:

(a)	Calculate the accounting break-even point. (Do not round your intermediate calculations.)
	(Click to select)  38,889 units  42,400 units  41,300 units  43,400 units  40,889 units

  

(b)	What is the degree of operating leverage at the accounting break-even point? (Do not round your intermediate calculations.)
	(Click to select)  1.19  12.177  12.077  11.977  1.092

   

Requirement 2:

(a)	Calculate the base-case cash flow. (Do not round your intermediate calculations.)
	(Click to select)  $1,323,300  $664,024  $1,343,300  $654,024  $1,363,300

  

(b)	Calculate the NPV. (Do not round your intermediate calculations.)
	(Click to select)  $664,024  $654,024  $5,695,756  $5,685,756  $5,675,756

   

(c)	What is the sensitivity of NPV to changes in the sales figure? (Do not round your intermediate calculations.)
	(Click to select)  $66.933  $42.585  $67.033  $67.133  $42.385

  

(d)	What your answer tells you about a 500-unit decrease in projected sales? (Do not round your intermediate calculations.)
	(Click to select)  -$653,024  -$34,516.34  -$33,516.34  -$654,024  -$32,516.34

  

Requirement 3:

(a)	What is the sensitivity of OCF to changes in the variable cost figure? (Do not round your intermediate calculations.)
	(Click to select)  -$88,440  $87,440  $-43,400  $-42,400  $89,440

   

(b)	What your answer tells you about a $1 decrease in estimated variable costs? (Do not round your intermediate calculations.)
	(Click to select)  $43,400  $87,440  $88,440  $89,440  $44,400

Answer 1