## Question

###### Needing help with portion b-3 and c. I have solved the other portions. We are evaluating...

Needing help with portion b-3 and c. I have solved the other portions.

We are evaluating a project that costs $848,000, 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 62,000 units per year. Price per unit is $40, variable cost per unit is $20, and fixed costs are $636,000 per year. The tax rate is 35 percent, and we require a return of 20 percent on this project.

**a.** Calculate the accounting break-even point. **(Do not round intermediate calculations and round your answer to the 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 answer to 3 decimal places, e.g., 32.161.)**

ΔNPV/ΔQ $

**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) increase decrease by $

**c.**What is the sensitivity of OCF to changes in the variable cost figure?

**(A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)**

ΔOCF/ΔVC $

## Answers

b-3.

Sales revenue for base case 62,000 units = $ 40 x 62,000 = $ 2,480,000

Variable cost for 62,000 units = $ 20 x 62,000 = $ 1,240,000

Sales revenue for 61,500 units = $ 40 x 61,500 = $ 2,460,000

Variable cost for 61,500 units = $ 20 x 61,500 = $ 1,230,000

Depreciation = Initial cost /useful life = $ 848,000/8 = $ 106,000

Computation of annual cash flow for both cases:

For 62,000 units

For 61,500 unitsSales revenue

$ 2,480,000

$ 2,460,000

Less: Variable cost

$ 1,240,000

$ 1,230,000

Contribution

$ 1,240,000

$ 1,230,000

Less: Fixed cost

$ 636,000

$ 636,000

Operating profit

$ 604,000

$ 594,000

Less: Depreciation

$ 106,000

$ 106,000

Profit before tax

$ 498,000

$ 488,000

Less: Tax @ 35%

$ 174,300

$ 170,800

Profit after tax

$ 323,700

$ 317,200

Add: Depreciation

$ 106,000

$ 106,000

Annual cash flow

$ 429,700

$ 423,200

Computation of NPV for both cases:

For 62,000 units

For 61,500 units

Year

Computation of

PV Factor

PV Factor

@ 20 %

Cash flow

PV

Cash flow

PV0

1/(1+0.2)^0

1

($848,000)

($848,000)

($848,000)

($848,000)

1

1/(1+0.2)^1

0.8333333333

$ 429,700

$358,083.33

$ 423,200

$352,666.67

2

1/(1+0.2)^2

0.6944444444

$ 429,700

$298,402.78

$ 423,200

$293,888.89

3

1/(1+0.2)^3

0.5787037037

$ 429,700

$248,668.98

$ 423,200

$244,907.41

4

1/(1+0.2)^4

0.4822530864

$ 429,700

$207,224.15

$ 423,200

$204,089.51

5

1/(1+0.2)^5

0.4018775720

$ 429,700

$172,686.79

$ 423,200

$170,074.59

6

1/(1+0.2)^6

0.3348979767

$ 429,700

$143,905.66

$ 423,200

$141,728.82

7

1/(1+0.2)^7

0.2790816472

$ 429,700

$119,921.38

$ 423,200

$118,107.35

8

1/(1+0.2)^8

0.2325680394

$ 429,700

$99,934.49

$ 423,200

$98,422.79

NPV

$800,827.57

NPV

$775,886.03Change in NPV = Base case NPV for sales of 62,000 units – NPV for sales of 61,500 units

= $ 800,827.57 - $ 775,886.03 = $ 24,941.54

NPV will

decreaseby$ 24,941.54c.

Δ OCF/ Δ VC = ($ 429,700 - $ 423,200)/ ($ 1,240,000 - $ 1,230,000)

= $ 6,500/$ 10,000 = 0.65 or

1