Question

we are evaluating a project that costs $848,000, has an eight-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 62,000 units per year. price per unit is $40, variable cost per unit is $24, and fixed costs are $636,000 per year. the tax rate is 24 percent, and we require a return of 20 percent on this project.

Answer 1

A project's susceptibility to undesirable fluctuations in the value of the underlying factors, such as the sales price, sales units, its indirect cost, and other variables, is assessed using sensitivity analysis.

Sensitivity analysis: What is it?

According to a specific set of assumptions, sensitivity analysis evaluates how various values of an exogenous variables impact a specific dependent variable. In other words, analyses look at how different types of ambiguity in a mathematical formula affect the overall level of uncertainty in the model.

Briefing:

Project has an eight-year lifespan, costs $848,000, and has no residual value. Over the course of the project's life, depreciation decreases linearly to zero.

Depreciation = $848,000 / 8 = $106,000

Contribution margin per unit = selling price - variable cost per unit

= 40 - 20 = $20 per unit

Accounting break-even point = (Fixed costs + Depreciation) / Contribution per unit

= (625,000 + 106,000) / 20

= 36,550 units

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