We are evaluating a project that costs $903,000, has an 11-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 104,000 units per year. Price per unit is $35, variable cost per unit is $21, and fixed costs are $908,418 per year. The tax rate is 32 percent, and we require a 19 percent return on this project.
(Do not round your intermediate calculations.)
Requirement 1:
(a) Calculate the accounting break-even point.
(b) What is the degree of operating leverage at the accounting break-even point?
Requirement 2:
(a) Calculate the base-case cash flow
(b) Calculate the NPV.
(c) What is the sensitivity of NPV to changes in the sales figure?
(d) What your answer tells you about a 500-unit decrease in projected sales?
Requirement 3:
(a) What is the sensitivity of OCF to changes in the variable cost figure?
(b) What your answer tells you about a $1 decrease in estimated variable costs?
We are evaluating a project that costs $903,000, has an 11-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 104,000 units per year. Price per unit is $35, variable cost per unit is $21, and fixed costs are $908,418 per year. The tax rate is 32 percent, and we require a 19 percent return on this project.
(Do not round your intermediate calculations.)
Requirement 1:
(a) Calculate the accounting break-even point.
(b) What is the degree of operating leverage at the accounting break-even point?
Requirement 2:
(a) Calculate the base-case cash flow
(b) Calculate the NPV.
(c) What is the sensitivity of NPV to changes in the sales figure?
(d) What your answer tells you about a 500-unit decrease in projected sales?
Requirement 3:
(a) What is the sensitivity of OCF to changes in the variable cost figure?
(b) What your answer tells you about a $1 decrease in estimated variable costs?
