Problem 9-1 Sensitivity Analysis and Break-Even Point We are evaluating a projec

Question

Problem 9-1 Sensitivity Analysis and Break-Even Point We are evaluating a project that costs $832 000, has an elght-year Iife, and has no salvege value. Assume that depreciation is straight ine 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 $728,000 per year. The tax rate Is 35 percent, and we require a return of 18 percent on this project. a. Calculate the accounting break-even point (Do not round Intermedlate calculetions and 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 notround Intermediate calculations and rund 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 Intermediete calculetions and round your answer to 3 decimal places, e.g.. 32.161) b-3 Calculate the change In NPV if sales were to drop by 500 units. (Enter your enswer as a positive number. Do not round intermedlate celculetions and round your answer to 2 decimal places, e.g.. 3216.) NPV would (Click to select .] by s? ? c. What is the sensimvity of OCF to changes in the vanable cost figure? (A negetive answer should be indicated by o minus sign. Do not round Intermedlate celculetions and round your answer to the nearest whole number.e.g-322)

Explanation / Answer

Solution :

First, we need to calculate the cash flow each year:

Breakeven = (Profit + total fixed cost) / contribution per unit

= (873600+ 5824000) and to compute the contribution per unit = 8000000/40,000 = 200

Hence the break even in units = 6697600/200 = 33488 units.

b-1 cash flow is calculated above :

Net present value is computed below :

b- 2 the change in net present value / change in sales = 37337/ 40,000 = .9334

Particulars 1 2 3 4 5 6 7 8 Sales(40,000*40) 1600000 1600000 1600000 1600000 1600000 1600000 1600000 1600000 Variable cost (40,000*15) 600000 600000 600000 600000 600000 600000 600000 600000 Gross margin 1000000 1000000 1000000 1000000 1000000 1000000 1000000 1000000 Fixed cost 728000 728000 728000 728000 728000 728000 728000 728000 Depreciation (832000/8) 104000 104000 104000 104000 104000 104000 104000 104000 Profit before tax 168000 168000 168000 168000 168000 168000 168000 168000 Tax@35% 58800 58800 58800 58800 58800 58800 58800 58800 Profit after tax 109200 109200 109200 109200 109200 109200 109200 109200 Cash flow (Profit +depreciation) 213200 213200 213200 213200 213200 213200 213200 213200

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