We are evaluating a project that costs $660,000, has a five-year life, and has n

Question

We are evaluating a project that costs $660,000, 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 69,000 units per year. Price per unit is $58, variable cost per unit is $38, and fixed costs are $660,000 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.)

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.)

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.)

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.)

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

Explanation / Answer

There are many question given so I am answering first two questions only.

(1) Break-even point = Fixed cost / (Sale – variable cost)

= 660000 / ($58 - $38) = 660000 / 20 = 33000 units.

(2) Degree of operating leverage at the accounting break-even point =

Contribution Margin / Net Income.

(33000 x 20) / 0 =

Note:

Net income at Break-even point is zero (Contribution 660000 – Fixed cost 660000) thus Degree of operating leverage at this point will be highest.

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