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o.retogin ×1D simple Inte, x-MMHE Reader × \\e Grammarly o Secure https/newconnect.mheducation.com/flow/connecthtml \\New Ta,b X (0) IRR Fule c * Apps er ce Fus on myAT&T; Login ay Gmail ( Mid-Atlantic Ch stic Homepage - Mid-A Pay Bil, See OffersPNC Bank - Online B in Messaging I Linkedin CengageBrain-My USPS.com® USPS i com&- USPS Homepage Mid- Pay Bill See Offers c PNC Bank Online R Mes aging Linkedin Cengage an My Week 3 Homework: Chapter 9 - Risk Analysis, Real Options. 6 Help Save & Exit Submit We are evaluating a project that costs $660,000, has a five-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 69000 units per year. Price per unit is $58, variable cost per unit is and fixed costs are $660,000 per year. The tax rate is 35 percent, and we require a return of 12 percent on this project. $38 10 a. Calculate the accounting break even point. (Do not round intermediote calculations and round your answer to the nearest number, e.g 32.) pped Break even point nits Book b-1 Calculate the base-case cash flow and NPV. (Do not round intermediate calculations and round y Print places, e.g, 32.16.) your NPV answer to 2 decimal 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.) ANPVIAQ b-3 Calculate the change in NPV if sales were to drop by 500 units. (Enter your answer as a positive number. Do not r intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV would | (Click to selectM by $- c. What is the sensitivity of OCF to changes in the variable cost figure? (A negative answer should be indicated by a minus not round intermediate calculations and round your answer to the nearest whole number, e.g., 32) Prev 1 or Next > ype here to search

Solution

Answer

Depreciation = (Cost – Salvage Value) / Useful years

= 660,000 / 5

Depreciation = $132,000 per year

a.

Breakeven point = (Fixed Cost + Depreciation) / Contribution Margin per unit

= (660,000 + 132,000) / (58 - 38)

Breakeven point = 39,600 Units

B – 1

Sales = $4,002,000(69000 Units * $58)

Cost = Variable Cost + Fixed Cost

= (69,000 units * $38) + 660,000

Cost = $3,282,000

Cash Flow = (Sales – Cost) * (1 – Tax ) + Depreciation * Tax

= ($4,002,000 - $3,282,000) * (1 – 0.35) + 132,000 * 0.35

= 468,000 + 46,200

Cash Flow = $514,200

NPV

NPV = Present Value of Cash Inflows – Initial Cash Outflow

Initial Cash Outflow = Cost of project = $660,000

Required Rate of Return = 12%

PVAF @ 12% for 5 Years = 3.605

NPV = (PVAF * Annual cash outflow) – Initial Cash Outflow

= (3.605 * 514,200) – 660,000

NPV = $1,193,691

B – 2

For calculating sensitivity, we need to fnd out another NPV at different units sold, So lets assume we have sold 80,000 Units

Sales = $4,640,000(80000 Units * $58)

Cost = Variable Cost + Fixed Cost

= (80,000 units * $38) + 660,000

Cost = $3,700,000

New Cash Flow = (Sales – Cost) * (1 – Tax ) + Depreciation * Tax

= ($4,640,000 - $3,700,000) * (1 – 0.35) + 132,000 * 0.35

= 940,000 + 46,200

New Cash Flow = $986,200

New NPV = (PVAF * Annual cash outflow) – Initial Cash Outflow

= (3.605 *986,200) – 660,000

New NPV = $2,895,251

Sensitivity of NPV to changes in Sales figure = Change in NPV / Change in Sales units

= (New NPV – Old NPV) / (New Sales Units –Old Sales Units)

= (2,895,251 - 1,193,691) / (80,000 – 69,000)

= 1,701,560 / 11,000 Units

Sensitivity of NPV to changes in Sales figure = $154.69

B – 3

If there is a drop in Sales, then there will be drop in NPV, so

Drop in NPV = 500 units * $154.69

Drop in NPV = $77,345

c.

Sensitivity of OCF to changes in Variable Cost figure.

=Change in OCF / Change in Variable Cost

= (New OCF – Old OCF) / (New Variable Cost–Old Variable Cost)

As above we calculated OCF at 69,000 Units and 80,000 Units, so we will take OCF and Variable cost from them.

= (3,700,000 - 3,282,000) / (986,200 - 514,200)

= 418,000 / 472,000

Sensitivity of OCF to changes in Variable Cost figure = 0.886