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 12 percent return on this project. a. Calculate the accounting break-even point. (Do not round intermediate calculations and round your final answer to nearest whole number. (e.g., 32)) Break-even point units b-1 Calculate the base-case cash flow and NPV. (Do not round intermediate calculations and round your NPV answers 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 intermediate calculations and round your final answer to 3 decimal places. (e.g., 32.161)) NPV/ c. What is the sensitivity of OCF to changes in the variable cost figure? (Do not round intermediate calculations and Negative amount should be indicated by a minus sign.) CFIvc S

Explanation / Answer

A / 1 B C D E F 2 3 Quantity per annum               69,000 4 Life                         5 Yrs 5 Equipment cost $660,000 6 Depreciation to zero in                         5 Yrs 7 Yearly depreciation $132,000 8 Salvage value at the end of 5 years $0 9 Variable Cost per unit $38.00 10 Fixed Costs $660,000 11 Tax rate 35% 12 Expected return on investment 12% 13 14 a) Calculation of BEP-units 15 Quantity per annum               69,000 16 Price per unit $58.00 17 Sales $4,002,000 18 Less:Variable costs $2,622,000 =C15*C9 19 Contribution margin $1,380,000 20 Less:Fixed Costs $660,000 21 Net operating income $720,000 22 Less:Depreciation $132,000 23 Net Income before taxes $588,000 24 Less:Taxes @35% $205,800 25 Net Income after tax $382,200 26 Net operating Cash flow $514,200 =C25+C22 27 Calculation of BE Quantity 28 Contribution margin per unit $20.00 =C19/C15 29 Fixed Costs $660,000 30 Break even Units               33,000 31 32 b1. base cashflow& NPV 33 Period Cashflow PV@12% 34 0 -$660,000 -$660,000 =C34/(1+12%)^B34 35 1 $514,200 $459,107 36 2 $514,200 $409,917 37 3 $514,200 $365,997 38 4 $514,200 $326,783 39 5 $514,200 $291,771 40 41 Total: $1,911,000.00 $1,193,575.92 42 Base Cash Flow $1,911,000.00 43 NPV $1,193,575.92 44 45 b2. Changes in NPV to changes in Sales quantity 46 Period Cashflow PV@12% cashflow+10% PV@12% 47 0 -$660,000 -$660,000 -$660,000 -$660,000.00 48 1 $514,200 $459,107 $603,900 $539,196.43 49 2 $514,200 $409,917 $603,900 $481,425.38 50 3 $514,200 $365,997 $603,900 $429,844.09 51 4 $514,200 $326,783 $603,900 $383,789.37 52 5 $514,200 $291,771 $603,900 $342,669.08 53 54 Total: $1,911,000.00 $1,193,575.92 $2,359,500.00 $1,516,924.35 55 Normal +10% inc in Qty 56 Quantity per annum               69,000               75,900 57 Price per unit $58.00 $58.00 58 Sales $4,002,000 $4,402,200 59 Less:Variable costs $2,622,000 $2,884,200 60 Contribution margin $1,380,000 $1,518,000 61 Less:Fixed Costs $660,000 $660,000 62 Net operating income $720,000 $858,000 63 Less:Depreciation $132,000 $132,000 64 Net Income before taxes $588,000 $726,000 65 Less:Taxes @35% $205,800 $254,100 66 Net Income after tax $382,200 $471,900 67 Net operating Cash flow $514,200 $603,900 68 69 NPV normal $1,193,575.92 70 NPV when 10% increase in qty $1,516,924.35 71 Increase in NPV $323,348.43 72 Qty Normal               69,000 73 NPV when 10% increase in qty               75,900 74 Increase in Qty                 6,900 75 Therefore change in NPV/Change in Qty $46.86 76 77 c. Changes in Operating Cashflow to changes in Variable Cost 78 Normal +10% inc in VC Change 79 Quantity per annum               69,000               69,000 80 Price per unit $58.00 $58.00 81 Sales $4,002,000 $4,002,000 82 Less:Variable costs $2,622,000 $2,884,200 $262,200 83 Contribution margin $1,380,000 $1,117,800 84 Less:Fixed Costs $660,000 $660,000 85 Net operating income $720,000 $457,800 86 Less:Depreciation $132,000 $132,000 87 Net Income before taxes $588,000 $325,800 88 Less:Taxes @35% $205,800 $114,030 89 Net Income after tax $382,200 $211,770 90 Net operating Cash flow $514,200 $343,770 -$170,430 91 92 Change in OCF -$170,430 93 Change in Variable Cost $262,200 94 Therefore: -$0.65

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