We are evaluating a project that costs $972,000, has a four-year life, and has n
ID: 2711636 • Letter: W
Question
We are evaluating a project that costs $972,000, has a four-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 88,800 units per year. Price per unit is $35.15, variable cost per unit is $21.40, and fixed costs are $768,000 per year. The tax rate is 35 percent, and we require a return of 13 percent on this project.
Calculate the base-case cash flow and NPV. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations.Round your answer to 3 decimal places (e.g., 32.161).)
If there is a 500-unit decrease in projected sales, how much would the NPV drop? (Do not round intermediate calculations. Input your answer as a positive value. Round your answer to 2 decimal places (e.g., 32.16).)
What is the sensitivity of OCF to changes in the variable cost figure? (A negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)
If there is $1 decrease in estimated variable costs, how much would the increase in OCF be? (Round your answer to the nearest whole dollar amount (e.g., 1,234,567).)
*** Please show all work***
We are evaluating a project that costs $972,000, has a four-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 88,800 units per year. Price per unit is $35.15, variable cost per unit is $21.40, and fixed costs are $768,000 per year. The tax rate is 35 percent, and we require a return of 13 percent on this project.
Explanation / Answer
Answer: Requirement 1:
Base case Income after tax:
Answer: Requirement 2:
OCFnew = [($35.15 – 21.40)(90000) – $768,000](0.65) + 0.35($243,000)
OCFnew = $554550
And the NPV is:
NPVnew = –$972000 + $554550(PVIFA13%,4)
NPVnew = $677398.1
So, the change in NPV for every unit change in sales is:
NPV/S = ($677398.1 –156746.9)/(90000 – 88800)
NPV/S = +$433.876
Answer: Requirement 3:
OCFnew = [($35.15 – 21.40)(88300) – $768,000](0.65) + 0.35($243,000)
OCFnew = $375031.25
NPV:
than NPV is drop by (143455.4-156746.9)=13291.5
Particulars amount ($) Sales 3121320 88800*35.15 Less: Variable cost 1900320 88800*21.40 Contribution 1221000 Less: Fixed cost 768000 Less: Dep 243000 972000/4 Income before tax 210000 Less:Tax @35% 73500 Income after tax 136500 Add: Dep 243000 Operating cash flow 379500Related Questions
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