We are evaluating a project that costs $732,000, has a six-year life, and has no

Question

We are evaluating a project that costs $732,000, has a six-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 55,000 units per year. Price per unit is $60, variable cost per unit is $30, and fixed costs are $640,000 per year. The tax rate is 35 percent, and we require a return of 12 percent on this project.

Calculate the accounting break-even point. (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.)

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.)

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.)

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.)

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. )

We are evaluating a project that costs $732,000, has a six-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 55,000 units per year. Price per unit is $60, variable cost per unit is $30, and fixed costs are $640,000 per year. The tax rate is 35 percent, and we require a return of 12 percent on this project.

Explanation / Answer

Part a-1

Annual Depreciation = (cost of asset – salvage value)/ life of the project

                                         = (732,000 – 0)/6

                                         = 122,000

Accounting breakeven point = (fixed cost + depreciation)/ ( price – variable cost per unit)

                                                         = (640,000 +122,000)/ (60-30)

                                                         = 762,000 / 30

                                                         = 25400

Part a-2

Degree of operating leverage = Q x (P-Vc)/(Q x (P-Vc)- fixed cost – depreciation)

                                                          = 25,400 x (60-30) / (25,400 x (60-30) -640,000-112,000)

                                                          =762,000 / 0

                                                          = Infinity

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