Question

We are evaluating a project that costs $756,000, has a six-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 67,000 units per year. Price per unit is $60, variable cost per unit is $25, and fixed costs are $693,000 per year. The tax rate is 35 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 the nearest whole number, e.g., 32.) Break-even point 23400 23400 Correct 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 $ 1,117,900 1,117,900 Correct NPV $ 2961576.45 2961576.45 Correct 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 $ 1.261 1.261 Incorrect 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 decrease Correct by $ 37827 37827 Correct 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 $ Not attempted

Answer 1

	0	1	2	3	4	5	6
Investment	-756,000
Sales		4,020,000	4,020,000	4,020,000	4,020,000	4,020,000	4,020,000
VC		-1,675,000	-1,675,000	-1,675,000	-1,675,000	-1,675,000	-1,675,000
FC		-693,000	-693,000	-693,000	-693,000	-693,000	-693,000
Depreciation		-126,000	-126,000	-126,000	-126,000	-126,000	-126,000
EBT		1,526,000	1,526,000	1,526,000	1,526,000	1,526,000	1,526,000
Tax (35%)		-534,100	-534,100	-534,100	-534,100	-534,100	-534,100
Net Income		991,900	991,900	991,900	991,900	991,900	991,900
Cash Flows	-756,000	1,117,900	1,117,900	1,117,900	1,117,900	1,117,900	1,117,900
NPV	$2,961,587.76

a) Accounting break-even point = (FC + Depreciation) / (Price - VC) = (693,000 + 126,000) / (60 - 25) = 23,400

b) Cash Flow = Net Income + Depreciation = 1,117,900

NPV can be calculated using the same function in excel using 20% discount rate.

NPV = $2,961,587.76

c) ΔNPV/ΔQ is the change in NPV if unit sales increase by 1 unit.

=> ΔNPV/ΔQ = $75.66

d) Change in NPV = 75.66 x 500 = $37,827.68

e) ΔOCF/ΔVC is the change in OCF if the VC increase by $1

=> ΔOCF/ΔVC = $43,550