We are evaluating a project that costs $780,000, has an eight-year life, and has no salvage value

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We are evaluating a project that costs $780,000, 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 92,000 units per year. Price per unit is $37, variable cost per unit is $23, and fixed costs are $875,000 per year. The tax rate is 35 percent, and we require a return of 15 percent 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 OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs.

Salvage Value
Salvage 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...
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Corporate Finance Core Principles and Applications

ISBN: 978-1259289903

5th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

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