Answer:
Depreciation = $864,000/8 = $108,000 per year
a. Accounting breakeven =
= ($765,000 + 108,000)/($49 - $33)
= 54,563 units
b&c. OCF base= [(P – v)Q – FC](1 – tc) + tc D
OCF base= [($49 – 33)(71,000) – $765,000](0.65) + 0.35($108,000)
OCF base=[$1,136,000-$765,000]0.65 +$37,800
OCF base= [$371,000] 0.65 +$37,800
OCF base=$241,150+$37,800
OCF base=$278,950
Calculating the NPV using our base-case projections. Also, no salvage value, hence the NPV=
NPV(base) = –$864,000+ $278,950 (PVIFA10%,8)
NPV(base) = -864,000+$278,950 x 5.335
NPV(base) = -864,000+ 1,488,178
NPV(base) = $624,178
We will use sales of 72,000 units in calculating the sensitivity of the NPV
OCF new = [($37 - 21)(72,000) - $765,000](0.65) + 0.35(108,000)
OCF new = [ $1,152,000-$765,000]0.65+0.35 (108,000)
OCF new = [387,000] 0.65 + $37,800
OCF new = $251,550+37,800
OCF new = $289,350
NPVnew= –$864,000 + $289,350(PVIFA15%,8)
NPVnew=-$864,000+$289,350 x 5.335
NPVnew=- $679,661
So, the change in NPV for every unit change in sales is:
DNPV/DS = ($624,178 – 679,661)/(71,000 – 72,000)
NPV/DS = +$55.48
If sales were to drop by 500 units, then NPV would drop by:
NPV drop = $55.48(500)
NPV drop = $27,742.
