We are evaluating a project that costs $907,000, has an 14-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales
We are evaluating a project that costs $907,000, has an 14-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
![We are evaluating a project that costs $907,000, has an 14-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 94,000 units per year. Price per unit is $42, variable cost per unit is $22,
and fixed costs are $916,070 per year. The tax rate is 35 percent, and we require a 10
percent return on this project.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0da2036f-8bf1-44f0-a09c-54c13cf955b8%2F78bcb25f-6006-43a0-9015-f2d19b5a6c6a%2Fvj2c41f_processed.png&w=3840&q=75)
Transcribed Image Text:We are evaluating a project that costs $907,000, has an 14-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 94,000 units per year. Price per unit is $42, variable cost per unit is $22,
and fixed costs are $916,070 per year. The tax rate is 35 percent, and we require a 10
percent return on this project.
![(a)Calculate the accounting break-even point. (Do not round your intermediate
calculations.)
|(Click to select) ♥
(b)What is the degree of operating leverage at the accounting break-even point? (Do not
round your intermediate calculations.)
|(Click to select) ♥
Requirement 2: Base-Case & NPV Sensitivity
(a)Calculate the base-case operating cash flow. (Do not round your intermediate
calculations.)
|(Click to select) ♥
(b)Calculate the base-case NPV. (Do not round your intermediate calculations.)
|(Click to select) ♥
(c) What is the sensitivity/elasticity of NPV to changes in the sales figure?
Recall from your economics class that an elasticity measures a percentage change in
one variable due to a percentage change in another. So simply increase sales
quantity by 1 percent, calculate the new NPV, and then calculate the percentage
change in the NPV. (Do not round your intermediate calculations.)
(Click to select) v](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0da2036f-8bf1-44f0-a09c-54c13cf955b8%2F78bcb25f-6006-43a0-9015-f2d19b5a6c6a%2Fgz6l91b_processed.png&w=3840&q=75)
Transcribed Image Text:(a)Calculate the accounting break-even point. (Do not round your intermediate
calculations.)
|(Click to select) ♥
(b)What is the degree of operating leverage at the accounting break-even point? (Do not
round your intermediate calculations.)
|(Click to select) ♥
Requirement 2: Base-Case & NPV Sensitivity
(a)Calculate the base-case operating cash flow. (Do not round your intermediate
calculations.)
|(Click to select) ♥
(b)Calculate the base-case NPV. (Do not round your intermediate calculations.)
|(Click to select) ♥
(c) What is the sensitivity/elasticity of NPV to changes in the sales figure?
Recall from your economics class that an elasticity measures a percentage change in
one variable due to a percentage change in another. So simply increase sales
quantity by 1 percent, calculate the new NPV, and then calculate the percentage
change in the NPV. (Do not round your intermediate calculations.)
(Click to select) v
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