Problem 9-1 Sensitivity Analysis and Break-Even Point

We are evaluating a project that costs $800,000, 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 60,000 units per year. Price per unit is $40, variable cost per unit is $20, and fixed costs are $800,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on this project.

a.	Calculate the accounting break-even point. (Do not round intermediate calculations and round your final answer to nearest whole number (e.g., 32).)

Break-even point

units

b-1	Calculate the base-case cash flow and NPV. (Do not round intermediate calculations and round your NPV answer to 2 decimal places (e.g., 32.16).)

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 final answer to 3 decimal places (e.g., 32.161).)

NPV/Q

$

b-3	Calculate the change in NPV if sales were to drop by 500 units. (Enter your answer as a positive number. Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).)

NPV would (Click to select)decreaseincrease by $

c.	What is the sensitivity of OCF to changes in the variable cost figure? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to nearest whole number (e.g., 32).)

OCF/VC

$