Sensitivity Analysis and Break-Even (LO1, 3) We are evaluating a project that costs $864,000, 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 71,000 units per year. Price per unit is $49, variable cost per unit is $33, and fixed costs are $765,000 per year. The tax rate is 35%, and we require a 10% return 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 sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales. 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.
Sensitivity Analysis and Break-Even (LO1, 3) We are evaluating a project that costs $864,000, 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 71,000 units per year. Price per unit is $49, variable cost per unit is $33, and fixed costs are $765,000 per year. The tax rate is 35%, and we require a 10% return 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 sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales. 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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:5. Sensitivity Analysis and Break-Even (LO1, 3) We are evaluating a project
that costs $864,000, 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 71,000 units per year. Price per unit is $49, variable cost per unit is
$33, and fixed costs are $765,000 per year. The tax rate is 35%, and we require
a 10% return 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 sales figure? Explain what your answer tells you about a
500-unit decrease in projected sales.
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.
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