NotSecure Elto.meddcationp We are evaluating a project that costs $832,000, has

Question

NotSecure Elto.meddcationp We are evaluating a project that costs $832,000, 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 40,000 units per year. Price per unit is $40, variable cost per unit is $15, and fixed costs are $700,000 per year. The tax rate is 35 percent, and we require a return of 18 percent on this project a-1 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 a-2 What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.) DOL 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) Cash flow NPV 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.) ANPVIAQ 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. AOCFIAVC References eBook & Resources Worksheet Learning Objective: 11-01 How to perform and interpret a sensitivity analysis for a proposed investment Section: 11.4 Opera

Explanation / Answer

a-1) Contribution margin per unit = $40-$15 = $                25 Fixed costs = 700000+832000/8 = $    8,04,000 Break even point in units = Fixed costs/CM per unit = 804000/25 = 32160 Units a-2) Degree of operating leverage at the accounting BEP = Contribution/EBIT = (32160*25)/(32160*25-804000) = 804000/0 = ? [Infinity] b-1) Cash flow: Contribution margin = 40000*$25 = 1000000 Less: Fixed costs 804000 EBIT 196000 Tax at 35% 68600 NOPAT 127400 Add: Depreciation (832000/8) 104000 Base case cash flow 231400 NPV: PV of OCF = 231400*(1.18^8-1)/(0.18*1.18^8) = 943549 Less: Initial investment 840000 Base case NPV 103549 b-2) Sensitivity to sales figure (increase in quantity): With 10% increase in sales figure: Cash flow: Sales = 40000*40*110% = 1760000 Variable cost = 40000*110%*15 = 660000 Contribution margin 1100000 Less: Fixed costs 840000 EBIT 260000 Tax at 35% 91000 NOPAT 169000 Add: Depreciation (832000/8) 104000 Revised cash flow 273000 NPV: PV of OCF = 273000*(1.18^8-1)/(0.18*1.18^8) = 1113175 Less: Initial investment 840000 Revised NPV 273175 Delta NPV/Delta Quantity = (273175-103549)/(40000*10%) = $          42.41 c) Sensitivity to Variable cost: Sales = 40000*40 = 1600000 Variable cost = 40000*110%*15 = 660000 Contribution margin 940000 Less: Fixed costs 840000 EBIT 100000 Tax at 35% 35000 NOPAT 65000 Add: Depreciation (832000/8) 104000 Revised OCF 169000 Delta NPV/Delta Quantity = (-169000-273175)/(660000-600000) = $          -1.74

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