Answer:
A) In Best Case: revenues rise by 10% while costs decline by 10%. In the worst case, profits are declining by 10%, while costs are rising by 10%.
Scenario Unit sales Variable costs Fixed costs
Base 360 $16,300 $334,000
Best 396 $14,670 $300,600
Worst 324 $17,930 $367,400
b), c) Using the tax shield approach, the OCF and NPV for the base case estimate is:
OCF(base) = [($19,800 – 16,300)(360) – 334,000](0.60) + 0.40(1,006,000/4)
OCF(base)= $656,200
NPV(base) = –$1,006,000 + $656,200(PVIFA14%,4)
NPV(base) = $905,978.01
OCF(worst) = [($19,800 – 17,930)(324) – 367,400](0.60) + 0.40(1,006,000/4)
OCF(worst)= $243,688
NPV(worst) = –$1,006,000 + $243,688(PVIFA14%,4)
NPV(worst) = $ (295,963.28)
OCF(best) = [($19,800 – 14,670)(396) – 300,600](0.60) + 0.40(1,006,000/4)
OCF(best)= $1,139,128
NPV(best) = –$1,006,000 + $1,139,128(PVIFA14%,4)
NPV(best) = $2,313,091.27
d) OCF and NPV with Fixed Costs 344,000
OCF(base) = [($19,800 – 16,300)(360) – 344,000](0.60) + 0.40(1,006,000/4)
OCF(base)= $650,200
NPV(base) = –$1,006,000 + $650,200(PVIFA14%,4)
NPV(base) = $888,295.74
e) (Change in NPV in Case d wrt Case c)/Change in FC,
(888,295.74 - 905,978.01)/(10,000) = -1.75
