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 $20, and fixed costs are $636,000 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. 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. Round your cash flow answer to the nearest whole number, e.g., 32. Round your NPV answer to 2 decimal places, e.g., 32.16.)

NPV $______

Cash Flow $______

B-2 What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

ΔNPV/ΔQ $______

B-3 Calculate the change in NPV if sales were to drop by 500 units.

NPV would increase OR decrease by $__________

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

ΔOCF/ΔVC $__________

Answer 1