We are evaluating a project that costs $951,000, has an 10-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 81,000 units per year. Price per unit is $45, variable cost per unit is $22, and fixed costs are $952,902 per year. The tax rate is 36 percent, and we require a 11 percent return on this project.
Requirement 1: Break-Even
(a) Calculate the accounting break-even point. (Do not round your intermediate calculations.)
(b) What is the degree of operating leverage at the accounting break-even point? (Do not round your intermediate calculations.)
Requirement 2: Base-Case & NPV Sensitivity
(a) Calculate the base-case operating cash flow. (Do not round your intermediate calculations.)
(b) Calculate the base-case NPV. (Do not round your intermediate calculations.)
(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.) (d) Based on this sensitivity, what is the change in NPV (in dollars) if there is a 7 percent decrease in projected sales? (Do not round your intermediate calculations.)
Requirement 3: Sensitivity of OCF
(a) In addition to NPV, we can calculate the sensitivity of other things, such as OCF. What is the sensitivity of base-case OCF to changes in the variable cost? Estimate the sensitivity by increasing variable costs by 10%. (Do not round your intermediate calculations.)
(b) Based on this sensitivity, estimate the change in OCF (in dollars) given a 8% decrease in the variable costs? (Do not round your intermediate calculations.)