We are evaluating a project that costs $1,446,000, has a six-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 88,600 units per year. Price per unit is $35.05, variable cost per unit is $21.30, and fixed costs are $766,000 per year. The tax rate is 30 percent, and we require a return of 11 percent on this project.
1) Calculate the base-case cash flow and NPV.
2) What is the sensitivity of NPV to changes in the sales figure?
3) If there is a 500-unit decrease in projected sales, how much would the NPV drop?
4) What is the sensitivity of OCF to changes in the variable cost figure?
5) If there is $1 decrease in estimated variable costs, how much would the increase in OCF be?
| We are evaluating a project that costs $1,446,000, has a six-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 88,600 units per year. Price per unit is $35.05, variable cost per unit is $21.30, and fixed costs are $766,000 per year. The tax rate is 30 percent, and we require a return of 11 percent on this project. 1) Calculate the base-case cash flow and NPV. 2) What is the sensitivity of NPV to changes in the sales figure? 3) If there is a 500-unit decrease in projected sales, how much would the NPV drop? 4) What is the sensitivity of OCF to changes in the variable cost figure? 5) If there is $1 decrease in estimated variable costs, how much would the increase in OCF be? |
