Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 7, Problem 1QAP
Sensitivity Analysis and Break-Even Point We are evaluating a project that costs $604,000, has an 8-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 55,000 units per year. Price per unit is $36, variable cost per unit is $17, and fixed costs are $6S5,000 per year. The tax rate is 21 percent and we requtre a return of 15 percent on this project.
a. Calculate the accounting break-even point.
b. Calculate the base-case cash flow and
c. 1%at is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $l decrease m estimated variable costs.
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Consider a project with a 3-year life and no salvage value. The initial cost to set up the project is $100,000. This amount is to be linearly depreciated to zero over the life of the project.
The price per unit is $90, variable costs are $72 per unit and fixed costs are $10,000 per year. The project has a required return of 12%. Ignore taxes.
1. How many units must be sold for the project to achieve accounting break-even?
2. How many units must be sold for the project to achieve cash break-even?
3. How many units must be sold for the project to achieve financial break-even?
4. What is the degree of operating leverage at the financial break-even?
You are evaluating a project that costs $1,500,000; has a six-year life. 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 $34.50; variable cost per unit is $20.50; and fixed costs are $700,000 per year. The tax rate is 35%, and you require an 12% return on this project.
Calculate the base-case cash flow and NPV
. b. What is the sensitivity of NPV to a 1000 unit decrease in projected sales?
Consider a project with a 5-year
life and no salvage value. The
initial cost to set up the project is
$100,000. This amount is to be
linearly depreciated to zero over
the life of the project. The price
per unit is $70, variable costs are
$40 per unit and fixed costs are $
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Chapter 7 Solutions
Corporate Finance
Ch. 7 - Forecasting Risk What is forecasting risk? In...Ch. 7 - Sensitivity Analysis and Scenario Analysis What is...Ch. 7 - Prob. 3CQCh. 7 - Break-Even Point As a shareholder of a firm that...Ch. 7 - Prob. 5CQCh. 7 - Real Options Why does traditional NPV analysis...Ch. 7 - Real Options The Mango Republic has just...Ch. 7 - Prob. 8CQCh. 7 - Prob. 9CQCh. 7 - Project Analysis You are discussing a project...
Ch. 7 - Sensitivity Analysis and Break-Even Point We are...Ch. 7 - Prob. 2QAPCh. 7 - Prob. 3QAPCh. 7 - Prob. 4QAPCh. 7 - Prob. 5QAPCh. 7 - Prob. 6QAPCh. 7 - Prob. 7QAPCh. 7 - Prob. 8QAPCh. 7 - Prob. 9QAPCh. 7 - Prob. 10QAPCh. 7 - Prob. 11QAPCh. 7 - Prob. 12QAPCh. 7 - Prob. 13QAPCh. 7 - Prob. 14QAPCh. 7 - Prob. 15QAPCh. 7 - Prob. 16QAPCh. 7 - Prob. 17QAPCh. 7 - Prob. 18QAPCh. 7 - Prob. 19QAPCh. 7 - Prob. 20QAPCh. 7 - Prob. 21QAPCh. 7 - Prob. 22QAPCh. 7 - Prob. 23QAPCh. 7 - Prob. 24QAPCh. 7 - Prob. 25QAPCh. 7 - Prob. 26QAPCh. 7 - Prob. 28QAPCh. 7 - Prob. 29QAPCh. 7 - Prob. 30QAP
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