Question

We are evaluating a project that costs $1,100,000, has a ten-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 47,000 units per year. Price per unit is $50, variable cost per unit is $25, and fixed costs are $820,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on this project.
a-1. Calculate the accounting break-even point.
Break-even point units
a-2. What is the degree of operating leverage at the accountin g break-even point? (Round your answer to 3 decimal places. (e.g., 32.161))
DOL
b-1. Calculate the base-case cash flow and NPV. (Round your NPV answer 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 answer to 3 decimal places. (e.g., 32.161))
c. What is the sensitivity of OCF to changes in the variable cost figure? (Negative amount should be indicated by a minus sign.)

Answer 1

Answer:

Accountig Break even point

BEP= FIXED COST/SALES PRICE PER UNIT-VARIABLE COST PER UNIT

BEP=32.800

DOL= CHANGE IN INCOME%/CHANGE IN SALES%

DOL=7.45

VPN

$688,359.46

CASH FLOW

1.922.500

the change in sales price  increase in the sales price by 1% will result in an increase in the NPV by 12.393%

the change in sales price  decrease in the sales price by 1% will result in decrease in the NPV by 12.393%

the change in fixed cost  increase  by 1% will result in an decrease in the FCF  by -2.40%

Explanation:

project 1,100,000 10 110000

   

1 1,100,000 110000 990,000

2 990,000 110000 880,000

3 880,000 110000 770,000

4 770,000 110000 660,000

5 660,000 110000 550,000

6 550,000 110000 440,000

7 440,000 110000 330,000

8 330,000 110000 220,000

9 220,000 110000 110,000

10 110,000 110000 0

   

   

Units per yer 47000  

Price 50  

Cost 25  

Fixed cost 820000  

Tax rate 35%  

Return tax 10%  

Accountig Break even point

BEP= FIXED COST/SALES PRICE PER UNIT-VARIABLE COST PER UNIT

BEP=32.800

What is the degree of operating leverage at the accountin g break-even point?

DOL= CHANGE IN INCOME%/CHANGE IN SALES%

DOL=7.45

EBIT %= 465.000/2.350.000=19,7%  

EBIT %= 465.000/2.350.000=6,7%  

CHANGE IN EBIT= 465.000/110000  

CHANGE IN SALES=2.350.000/1.640.000  

b-1. Calculate the base-case cash flow and NPV. (Round your NPV answer to 2 decimal places. (e.g., 32.16))

Cash flow $

NPV $

 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Investement 1,100,000          

           

Income 2350000 2350000 2350000 2350000 2350000 2350000 2350000 2350000 2350000 2350000

Cost  1175000 1175000 1175000 1175000 1175000 1175000 1175000 1175000 1175000 1175000

Fixed cost  710000 710000 710000 710000 710000 710000 710000 710000 710000 710000

TAX 35%  162750 162750 162750 162750 162750 162750 162750 162750 162750 162750

Cash  302250 302250 302250 302250 302250 302250 302250 302250 302250 302250

           

Discount rate            

10%            

VPN            

$688,359.46 -1100000 302250 302250 302250 302250 302250 302250 302250 302250 302250 302250