Business, 24.03.2021 17:20, claradendulk

We are evaluating a project that costs $644,000, has an eight-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 70,000 units per year. Price per unit is $37, variable cost per unit is $21, and fixed costs are $725,000 per year. The tax rate is 35 percent, and we require a 15 percent return on this project. Required:
a. Calculate the accounting break-even point.
b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales.
c. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs.

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answered: reecce2233

Solution :

a).

Particulars Details

Selling price per unit 37

Less : variable cost per unit -21

Margin per unit 16

No. of units sold per unit 70,000

Gross margin 11,20,000

Less : fixed cost - 7,25,000

Profit before depreciation and tax 3,95,000

Less : depreciation -80,500

Profit before tax 3,14,500

Less : Tax -1,10,075

Net profit per year 2,04,425

Project Cost 6,44,000

Accounting breakeven point in years 3.15

b).

Calculating the base Cash - Cash flow and NPV

Particulars Amount

Net profit per year 2,04,425

Add : depreciation 80,500

Base Cash cashflow 2,84,925

Required rate of return 15%

Present value of base cash cash flow 12,78,550

received in 8 years.

Project cost -6,44,000

NPV 6,34,550

The present value of base cash cash flow received in 8 years is calculated as Present value of annuity received at the end of each year $ 2,84,925 at the rate of interest 15% for a period of 8 years.

The sensitivity of the NPV to 500 units decrease in projected sales :

Particulars Details

Selling price per unit 37

Less : variable cost per unit -21

Margin per unit 16

Number of units sold per year 69,500

Gross margin 11,12,000

Less : fixed cost -7,25,000

Profit before depreciation and tax 3,87,000

Less : depreciation -80,500

Profit before tax 3,06,500

Less : tax -1,07,275

Net profit per year 1,99,225

Add : depreciation 80,500

Base Cash cashflow 2,79,725

Required rate of return 15%

Present value of base cash cash flow 12,55,216

received in 8 years.

Project cost -6,44,000

NPV 6,11,216

Original NPV 6,34,550

Sensitive NPV -23,334

c).

Particulars Details

Selling price per unit 37

Less : variable cost per unit -20

Margin per unit 17

No. of units sold per year 70,000

Gross Margin 11,90,000

Less : fixed cost -7,25,000

Profit before depreciation and tax 4,65,000

Less : Depreciation -80,500

Profit before tax 3,84,500

Less : tax -1,34,575

Net profit per year 2,49925

Add : depreciation 80,500

Operating cash flow 3,30,425

Original operating cashflow 2,84,925

Sensitivity of OCF 45,500

answered: Guest

24 years, i believe is the correct answer.

answered: Guest

D. centrally planned economy hope this ! : d

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We are evaluating a project that costs $644,000, has an eight-year life, and has no salvage value. A...