Depreciation is straight-line to zero over life of project

Assignment Help Financial Management

Reference no: EM131498314

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.)

Reference no: EM131498314

Questions Cloud

What are the major goals of the fasb asc : What are the major goals of the FASB ASC? How is the FASB ASC expected to improve the practice of accounting? What literature is now contained in the FASB ASC?

Discuss ethical decision making style : What adjustments to your values and ethical decision making style have you had to make in teams in your own culture, and with others from different cultures.

Discuss any high profile or anecdotal cases of abuse : Discuss any high profile or anecdotal cases of use/abuse in elite athletes that have made the headlines and describe the rules.

Client is upset about the breakup of his marriage : A client is upset about the breakup of his marriage. He feels distraught and does not think that he will ever have another intimate relationship.

Depreciation is straight-line to zero over life of project : Assume that depreciation is straight-line to zero over the life of the project.

What is the difference between a gift and a bribe : What is the difference between a gift and a bribe? How would you, as a representative of your company, respond to the offer of a questionable bribe.

What is the purpose of the final chapter : Carwin confesses his crimes to Clara, but defends himself against accusations that he is responsible for Wieland's actions. What is the purpose of final chapter

Define social entrepreneur : Does globalization result in cultural and economic homogenization (alikeness) through a heightened emphasis on consumerism, or is this an exaggeration?.

Demonstrate evidence of dynamic reorganization of knowledge : Identify main ideas in readings; differentiate core ideas from supporting information; and detail and language demonstrate.

User Account

All Pages