Question

We are evaluating a project that costs $1,860,000, has a 6-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 89,300 units per year. Price per unit is $38.31, variable cost per unit is $23.50, and fixed costs are $833,000 per year. The tax rate is 21 percent, and we require a return of 9 percent on this project.
a.	Calculate the base-case operating cash flow and NPV. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b.	What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)
c.	If there is a 450-unit decrease in projected sales, how much would the NPV change? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
d.	What is the sensitivity of OCF to changes in the variable cost figure? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
e.	If there is a $1 decrease in estimated variable costs, how much would the OCF change? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

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Answer:

1.
=(89300*(38.31-23.50)-833000-1860000/6)*(1-21%)+1860000/6=451831.07

2.
=-1860000+((89300*(38.31-23.50)-833000-1860000/6)*(1-21%)+1860000/6)/9%*(1-1/1.09^6)=166877.40

3.
=(38.31-23.50)*(1-21%)/9%*(1-1/1.09^6)=52.485

4.
=-450*(38.31-23.50)*(1-21%)/9%*(1-1/1.09^6)=-23618.16

5.
=89300*(-1)*(1-21%)=-70547

6.
=-1*89300*(-1)*(1-21%)=70547