Lockhart Homebuilders is evaluating a project that costs $724,000, has an eight-year life, and has no salvage
Question:
Lockhart Homebuilders is evaluating a project that costs $724,000, 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 75,000 units per year. Price per unit is $39, variable cost per unit is $23, and fixed costs are $850,000 per year. The tax rate is 35 percent, and Lockhart requires a 15 percent return on this project.
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 operating cash flow to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs.
Salvage ValueSalvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
Corporate Finance
ISBN: 978-0071339575
7th Canadian Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Gordon Ro