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1 2 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. 3 4 Input area: 5 6 Initial cost 7 Project life 8 Units sales 9 Price/unit 10 Variable cost/unit 11 Fixed costs 12 Tax rate 13 Required return 14 b. New quantity for calculation 15 Projected sales change 16 c. New VC for calculation $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.) 17 Projected VC change 18 19 20 21 22 Output area: 23 24 a. Depreciation per year 25 Accounting break-even 26 DOL 27 b. Base OCF 28 Base NPV 29 OCF at new quantity 30 NPV at new quantity 31 32 DNPV/DQ Change in NPV for given quantity change 33 c. OCF DOCF/DVC 34 35 Change in NPV for given VC change $105,625 40,600.96

1 2 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. 3 4 Input area: 5 6 Initial cost 7 Project life 8 Units sales 9 Price/unit 10 Variable cost/unit 11 Fixed costs 12 Tax rate 13 Required return 14 b. New quantity for calculation 15 Projected sales change 16 c. New VC for calculation $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.) 17 Projected VC change 18 19 20 21 22 Output area: 23 24 a. Depreciation per year 25 Accounting break-even 26 DOL 27 b. Base OCF 28 Base NPV 29 OCF at new quantity 30 NPV at new quantity 31 32 DNPV/DQ Change in NPV for given quantity change 33 c. OCF DOCF/DVC 34 35 Change in NPV for given VC change $105,625 40,600.96

Corporate Fin Focused Approach
Corporate Fin Focused Approach
5th Edition
ISBN:9781285660516
Author:EHRHARDT
Publisher:EHRHARDT
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 8P
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1 2 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. 3 4 Input area: 5 6 Initial cost 7 Project life 8 Units sales 9 Price/unit 10 Variable cost/unit 11 Fixed costs 12 Tax rate 13 Required return 14 b. New quantity for calculation 15 Projected sales change 16 c. New VC for calculation $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.) 17 Projected VC change 18 19 20 21 22 Output area: 23 24 a. Depreciation per year 25 Accounting break-even 26 DOL 27 b. Base OCF 28 Base NPV 29 OCF at new quantity 30 NPV at new quantity 31 32 DNPV/DQ Change in NPV for given quantity change 33 c. OCF DOCF/DVC 34 35 Change in NPV for given VC change $105,625 40,600.96
Transcribed Image Text:1 2 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. 3 4 Input area: 5 6 Initial cost 7 Project life 8 Units sales 9 Price/unit 10 Variable cost/unit 11 Fixed costs 12 Tax rate 13 Required return 14 b. New quantity for calculation 15 Projected sales change 16 c. New VC for calculation $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.) 17 Projected VC change 18 19 20 21 22 Output area: 23 24 a. Depreciation per year 25 Accounting break-even 26 DOL 27 b. Base OCF 28 Base NPV 29 OCF at new quantity 30 NPV at new quantity 31 32 DNPV/DQ Change in NPV for given quantity change 33 c. OCF DOCF/DVC 34 35 Change in NPV for given VC change $105,625 40,600.96
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