We are evaluating a project that costs $757,000, has an 14-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 129,000 units per year. Price per unit is $44, variable cost per unit is $27, and fixed costs are $772,140 per year. The tax rate is 38 percent, and we require a 12 percent return on this project.
What is the sensitivity/elasticity of NPV to changes in the sales figure? Recall from your economics class that an elasticity measures a percentage changes in one variable due to a percentage change in another.
4.527
69.761
40.797
1.727
69.961
What is the sensitivity of OCF to changes in the variable cost? Estimate the sensitivity by increasing variable costs by 10%.
-1024
-2.4
976
-25002
32980
Based on this sensitivity, estimate the change in OCF (in dollars) given a 11% decrease in the variable costs?
$1026
$-974
$50601
$49601
$237640
1
Answer : 4.52
Wirking Notes For the above answer
| Particular | Amount In $ | |
| Sale price | 44 | 43 |
| Variable cost | 27 | 27 |
| Contribution | 17 | 16 |
| Units sold | 129000 | 129000 |
| Total Contribution | 2193000 | 2064000 |
| Less: | ||
| fixed costs | 772140 | 772140 |
| EBT | 1420860 | 1291860 |
| Less : Tax @ 38% | 539926.8 | 490906.8 |
| Earning After Tax | 880933.2 | 800953.2 |
| Add: DTS (54071.42 x 38%) | 20547.14286 | 20547.14 |
| Net Cash Flow | 901480.3429 | 821500.3 |
| NPV Of the project | ||
| project that costs | 757000 | 757000 |
| Less: | ||
| CASh Floe x PVIFA (12% , 14 Year) 901480 x 6.6282 |
5975192.009 | 5445069 |
| 5218192.009 | 4688069 | |
| Diffrance | 530123.4 | |
| Per Unit | 4.52 |
What is the sensitivity of OCF to changes in the variable cost? Estimate the sensitivity by increasing variable costs by 10%
| Sale price | 44 | 44 |
| Variable cost | 27 | 29.7 |
| Contribution | 17 | 14.3 |
| Units sold | 129000 | 129000 |
| Total Contribution | 2193000 | 1844700 |
| Less: | ||
| fixed costs | 772140 | 772140 |
| EBT | 1420860 | 1072560 |
| Less : Tax @ 38% | 539926.8 | 407572.8 |
| Earning After Tax | 880933.2 | 664987.2 |
| Add: DTS (54071.42 x 38%) | 20547.14286 | 20547.14 |
| Net Cash Flow | 901480.3429 | 685534.3 |
| Change in Cash Flow | -215946 | |
| Per unit change | -1.674 |
Based on this sensitivity, estimate the change in OCF (in dollars) given a 11% decrease in the variable costs
Answer : $ 237640
| Particular | Amount In $ | |
| Sale price | 44 | 44 |
| Variable cost | 27 | 24.03 |
| Contribution | 17 | 19.97 |
| Units sold | 129000 | 129000 |
| Total Contribution | 2193000 | 2576130 |
| Less: | ||
| fixed costs | 772140 | 772140 |
| EBT | 1420860 | 1803990 |
| Less : Tax @ 38% | 539926.8 | 685516.2 |
| Earning After Tax | 880933.2 | 1118474 |
| Add: DTS (54071.42 x 38%) | 20547.14286 | 20547.14 |
| Net Cash Flow | 901480.3429 | 1139021 |
| Change in Cash Flow | 237540.6 |
