We are evaluating a project that costs $1,180,000, has a five-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 88,100 units per year. Price per unit is $34.80, variable cost per unit is $21.05, and fixed costs are $761,000 per year. The tax rate is 40 percent, and we require a return of 10 percent on this project.
Requirement 1: Calculate the base-case cash flow and NPV. Base-case cash flow $
NPV $
Requirement 2: What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).) Sensitivity of NPV $
Requirement 3: If there is a 500-unit decrease in projected sales, how much would the NPV drop? NPV drop $
Requirement 4: What is the sensitivity of OCF to changes in the variable cost figure? Sensitivity of OCF $
Requirement 5: If there is $1 decrease in estimated variable costs, how much would the increase in OCF be? Increase in OCF $
ct that costs $1,180,000, has a five-year life,
Depreciation = $1180000/5
Depreciation = $236000 per year
Requirement 1: Calculate the base-case cash flow and NPV. Base-case cash flow $ NPV $
| Price per unit is $34.80, | 34.8 |
| Less : | |
| variable cost per unit is $21.05, | 21.05 |
| Contribution | 13.75 |
| Units sold | 88100 |
| Tital Contribution | 1211375 |
| Less : | |
| Fixed Cost | 761000 |
| 450375 | |
| Tax rate @ 40% | 180150 |
| Add | |
| Depriciation Tax Shelter 236000 x 0.40 |
94,400 |
| Per year Cash Flow | 364625 |
| Year | Cash Flow | PV Factro @ 10% |
|
| 0 | -1180000 | 1 | -1180000 |
| 1 | 364625 | 0.90909 | 331477 |
| 2 | 364625 | 0.82645 | 301343 |
| 3 | 364625 | 0.75131 | 273948 |
| 4 | 364625 | 0.68301 | 249044 |
| 5 | 364625 | 0.62092 | 226403 |
| 202216 |
Requirement 2: What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).) Sensitivity of NPV $
| Price per unit is $34.80, | 34.8 |
| Less : | |
| variable cost per unit is $21.05, | 21.05 |
| Contribution | 13.75 |
| Units sold | 83100 |
| Tital Contribution | 1142625 |
| Less : | |
| Fixed Cost | 761000 |
| 381625 | |
| Tax rate @ 40% | 152650 |
| Add | |
| Depriciation Tax Shelter 236000 x 0.40 |
94,400 |
| Per year Cash Flow | 323,375 |
Requirement 3: If there is a 500-unit decrease in projected sales, how much would the NPV drop? NPV drop $
| Year | Cash Flow | PV Factro @ 10% |
|
| 0 | -1180000 | 1 | -1180000 |
| 1 | 323375 | 0.90909 | 293977 |
| 2 | 323375 | 0.82645 | 267252 |
| 3 | 323375 | 0.75131 | 242956 |
| 4 | 323375 | 0.68301 | 220869 |
| 5 | 323375 | 0.62092 | 200790 |
| 45845.7 |
| Change in NPV | |
| Old NPV | 202216 |
| New NPV | 45845.7 |
| Change in NPV | 156370.3 |
| 156370.3 /5000 Units | 31.27406 |
sensitivity of NPV to changes in the sales figure? = 31.274
Requirement 3: If there is a 500-unit decrease in projected sales, how much would the NPV drop? NPV drop $ = $ 15637
Sensitivity NPV = 31.274 per units
So if there is change in 500 units then NPV will change as follow
= 500 units x 31.274 per units
=$ 15637
Requirement 4: What is the sensitivity of OCF to changes in the variable cost figure? Sensitivity of OCF $
Requirement 5: If there is $1 decrease in estimated variable costs, how much would the increase in OCF be? Increase in OCF $
If there is change in $ 1 variable Cost then New NPV
| Price per unit is $34.80, | 34.8 |
| Less : | |
| variable cost per unit is $20.05, | 20.05 |
| Contribution | 14.75 |
| Units sold | 88100 |
| Tital Contribution | 1299475 |
| Less : | |
| Fixed Cost | 761000 |
| 538475 | |
| Tax rate @ 40% | 215390 |
| Add | |
| Depriciation Tax Shelter 236000 x 0.40 |
94,400 |
| Per year Cash Flow | 417,485 |
| Year | Cash Flow | PV Factro @ 10% |
|
| 0 | -1180000 | 1 | -1180000 |
| 1 | 417485 | 0.90909 | 379532 |
| 2 | 417485 | 0.82645 | 345029 |
| 3 | 417485 | 0.75131 | 313663 |
| 4 | 417485 | 0.68301 | 285148 |
| 5 | 417485 | 0.62092 | 259225 |
| 402597 |
| Change in NPV | |
| Old NPV | 202216 |
| New NPV | 412597 |
| Change in NPV | 210381 |
| 210381 /88100Units | 2.3879796 |
Answer : Sensativity in NPV = 2.3879
