We are evaluating a project that costs $845,000, has an eight-year life, and has no salvage...

Transcribed Image Text:

We are evaluating a project that costs $845,000, 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 51,000 units per year. Price per unit is $53, variable cost per unit is $27, and fixed costs are $950,000 per year. The tax rate is 22 percent, and we require a return of 10 percent on this project. a. Calculate the accounting break-even point. What is the degree of operating leverage at the accounting break-even point? b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quantity sold? Explain what your answer tells you about a 500-unit decrease in the quantity sold. 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. Input area: Initial cost Project life Units sales Price/unit Variable cost/unit Fixed costs Tax rate Required return b. New quantity for calculation C. Projected sales change New VC for calculation Projected VC change $845,000.00 8 51,000 $53.00 $27.00 $950,000.00 22% 10% 52,000 (500) $28.00 ($1.00) + (Use cells A6 to C17 from the given information to complete this question. You must use the built-in Excel function to answer this question. The OCF must be calculated using the depreciation tax shield approach.) Output area: a. Depreciation per year Accounting break-even DOL = Graded Worksheet + We are evaluating a project that costs $845,000, 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 51,000 units per year. Price per unit is $53, variable cost per unit is $27, and fixed costs are $950,000 per year. The tax rate is 22 percent, and we require a return of 10 percent on this project. a. Calculate the accounting break-even point. What is the degree of operating leverage at the accounting break-even point? b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quantity sold? Explain what your answer tells you about a 500-unit decrease in the quantity sold. 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. Input area: Initial cost Project life Units sales Price/unit Variable cost/unit Fixed costs Tax rate Required return b. New quantity for calculation C. Projected sales change New VC for calculation Projected VC change $845,000.00 8 51,000 $53.00 $27.00 $950,000.00 22% 10% 52,000 (500) $28.00 ($1.00) + (Use cells A6 to C17 from the given information to complete this question. You must use the built-in Excel function to answer this question. The OCF must be calculated using the depreciation tax shield approach.) Output area: a. Depreciation per year Accounting break-even DOL = Graded Worksheet +