Evaluate project that costs $1.5 million has a 10-year life and no salvage value

Question

Evaluate project that costs $1.5 million has a 10-year life and no salvage value. Assume depreciation is straight line over the life of the project. Sales are projected at 150K units every year over the life of the project. Price per unit is $75, variable costs are $45 per unit, and fixed costs are $1,275,000 per year. The tax rate is 30% and the required rate of return is 15% after tax. Calculate: the accounting break-even point; the operating leverage at this break-even point; the base-case cash flow and its NPV. Also compute impact 10% decrease in expected sales or 5% increase in projected variable costs.

Explanation / Answer

Particulars Amount 10% decrease in sales 5% inc in VC number of units        150,000.00                            150,000.00           150,000.00 SP per unit'                  75.00                                      67.50                      75.00 VC per unit                  45.00                                      45.00                      47.25 Cont Per unit                  30.00                                      22.50                      27.75 Total contribution    4,500,000.00                        3,375,000.00       4,162,500.00 Fixed Costs    1,275,000.00                        1,275,000.00       1,275,000.00 Depreciation(1500000/10)        150,000.00                            150,000.00           150,000.00 Income or EBIT    3,075,000.00                        1,950,000.00       2,737,500.00 Tax@30%        922,500.00                            585,000.00           821,250.00 Income after tax    2,152,500.00                        1,365,000.00       1,916,250.00 Depreciation        150,000.00                            150,000.00           150,000.00 Cash Flows after Tax    2,302,500.00                        1,515,000.00       2,066,250.00 Accounting BEP = Fixed Costs / Cont'n per unit Accounting BEP = Fixed Costs / Cont'n per unit Accounting BEP = Fixed Costs / Cont'n per unit Accounting BEP =1275000/30 Accounting BEP =1275000/22.5 Accounting BEP =1275000/27.75 Accounting BEP =42,500 Units Accounting BEP =56,667 Units Accounting BEP =45,946Units Operating Leverage= Contn/EBIT Operating Leverage= Contn/EBIT Operating Leverage= Contn/EBIT Operating Leverage= 4500000/3075000 Operating Leverage= 3375000/1950000 Operating Leverage= 4162500/2737500 Operating Leverage= 1.46 Operating Leverage= 1.73 Operating Leverage= 152 No change 10% dec in Sales 5% inc in VC Particulars Time PVF Amount PV Amount PV Amount PV Cash Outlows- Purchase                         -                                      1.0000     (1,500,000.00) (1,500,000.00) (1,500,000.00) (1,500,000.00) (1,500,000.00)    (1,500,000.00) PV of Cash Outflows (1,500,000.00) (1,500,000.00)    (1,500,000.00) Cash Inflows 1-10                                    5.0200       2,302,500.00 11,558,550.00     1,515,000.00     7,605,300.00     2,066,250.00    10,372,575.00 PV of Cash Inflows 11,558,550.00     7,605,300.00    10,372,575.00 NPV 10,058,550.00     6,105,300.00      8,872,575.00

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.