Question

We are evaluating a project that costs $719,000, has a life of 15 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 124,000 units per year. Price per unit is $39, variable cost per unit is $20, and fixed costs are $728,347 per year. The tax rate is 22 percent, and we require a return of 17 percent on this project.

2c. What is the sensitivity of NPV to changes in the quantity sold?

• $78.904
• $49.106
• $79.004
• $78.804
• $49.306

2d. What your answer tells you about a 500-unit decrease in the quantity sold?

• $-39,452.23
• $-347,539.00
• $-40,452.23
• $-38,452.23
• $-346,539.00

3a. What is the sensitivity of OCF to changes in the variable cost figure?

• $-96,720
• $-41,857
• $-40,857
• $-97,720
• $-95,720

3b. How much will OCF change if variable costs decrease by $1?

• $96,720
• $41,857
• $97,720
• $95,720
• $42,857

Answer 1

2c]	Sensivity of NPV in quatity is increased by 1 unit = 19*0.78*(1.17^15-1)/(0.17*1.17^15) =	$             78.904
2d]	Impact of 500 unit decrease on NPV = -500*78.90445 =	$ -39,452.23
3a]	Sensitivity of OCF if variable cost per unit is increased by $1 = -1*124000*0.78 =	$ -96,720
3b]	OCF will change by	$             96,720