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We are evaluating a project that costs $1,140,000, has a life of 10 years, and has...

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Finance

We are evaluating a project that costs $1,140,000, has a life of10 years, and has no salvage value. Assume that depreciation isstraight-line to zero over the life of the project. Sales areprojected at 36,000 units per year. Price per unit is $50, variablecost per unit is $20, and fixed costs are $720,000 per year. Thetax rate is 23 percent and we require a return of 12 percent onthis project.

a.

Calculate the accounting break-even point.

b-1.

Calculate the base-case cash flow and NPV.

b-2.

What is the sensitivity of NPV to changes in the salesfigure?

c.What is the sensitivity of OCF to changes in the variable costfigure?

Answer & Explanation Solved by verified expert
4.0 Ratings (763 Votes)
Part aSo if the company produces 24000 units it will reach theaccounting break evenPart b1 Following steps need to be takenCalculate depreciationCalculate annual CF for years 110ParticularsRemarkCF years 110Units salesGiven36000SPGiven50SalesSP x Unit sales50 x 36000 1800000VC per unitGiven20Total Variable costVC per unit x Unit sales20 x 36000 720000Fixed costGiven720000EBITDASalesTotal Variable costFixed Cost1800000720000720000 360000DepreciationCalculated above11400000EBTEBITDADepreciation24600000Tax23 x EBT5658000EATEBTTax18942000DepreciationAdded back as non cash114000OCFEATDepreciation30342000Calculate NPVYearCFDiscount FactorDiscounted CF0 114000000110120111140000 1140000001 3034200011012108928570892857142857143303420 270910712 303420001101220797194079719387755102303420    See Answer
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