We are evaluating a project that costs $1,220,000, has a five-year life, and has

Question

We are evaluating a project that costs $1,220,000, has a five-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 88,900 units per year. Price per unit is $35.20, variable cost per unit is $21.45, and fixed costs are $769,000 per year. The tax rate is 30 percent, and we require a return of 10 percent on this project.

Requirement 1: Calculate the base-case cash flow and NPV. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

Base-case cash flow :

NPV :

Requirement 2: 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).)

Sensitivity of NPV:

Requirement 3: 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).) NPV drop:

Requirement 4: 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).)

Sensitivity of OCF:

Requirement 5: 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).)

Increase in OCF:

Explanation / Answer

The base-case cash flow

Project costs = $1,220,000, life = 5 years, salvage value = 0

Cash outflow = 1220000

PVF @ 10% at Y=0 = 1

Present value of cash outflow = 1220000 * 1 = 1220000

depreciation as per straight-line = project cost - salvage value / lfie of project

= 1220000-0 / 5 = 244000

Projected Sales = 88,900 units per year.

Sales (in Amount) = 88900 * $35.20 = 3129280

Less= Variable cost = 88900 * $21.45 = 1906905

Contribution = Sales - variable cost = 3129280- 1906905 = 1222375

Less = Fixed costs = $769,000

Profit before tax and depreciation (a)= 453375

Less= depreciation= 244000

Profit before tax = 209375

Less= Tax @ 30 % (b)= 62812

Profit after tax =(a)- (b) = 390563

Return of return on project.= 10% , Cummulative PVF of 5 years = 3.79

Present value of cash inflow = 390563 * 3.79 = 1480234

NPV = PV of cash inflow - PV of cash outflow

= 1480234 - 1220000 = 260234

2)  Sensitivity of NPV to changes in the sales figure = 260234 / 3129280 *100 = 8.32%

3)  projected sales decrease by 500-unit, then NPV decrease by 500unit*35.20 * 8.32% = 1464

4) Sensitivity of OCF to changes in the variable cost figure = 260234 / (1906905) * 100 = (13.65%)

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