We are evaluating a project that costs $845,000, has an eight-year life, and has no salvage value.Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at51,000 units per year. Price per unit is $53, variable cost per unit is $27, and fixed costs are $950,000per year. The tax rate is 22 percent, and we require a return of 10 percent on this project.a. Calculate the accounting break-even point. What is the degree of operating leverage at theaccounting break-even point?b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quantitysold? Explain what your answer tells you about a 500-unit decrease in the quantity sold.c. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tellsyou about a $1 decrease in estimated variable costs.Input area:C.Initial costProject lifeUnits salesPrice/unitVariable cost/unitFixed costsTax rateRequired returnb. New quantity for calculationProjected sales changeNew VC for calculationProjected VC change$845,000.00851,000$53.00$27.00$950,000.0022%10%52,000(500)$28.00($1.00) a. Depreciation per yearAccounting break-evenDOLb. Base OCFBase NPVOCF at new quantityNPV at new quantityDNPV/DQChange in NPV for given quantity changeC. OCFDOCF/DVCChange in NPV for given VC change$105,62540,600.969.994$316,517.50I

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Description: We are evaluating a project that costs $845,000, has an eight-year life, and has no salvage value.Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at51,000 units per year. Price per unit is $53, var

NPV is a capital budgeting tool to decide on whether the capital project is beneficial for the…

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ume that depreciation is straight-line to zero over the life of the project. Sales are projected at 000 units per year. Price per unit is $53, variable cost per unit is $27, and fixed costs are $950,00 year. The tax rate is 22 percent, and we require a return of 10 percent on this project. alculate the accounting break-even point. What is the degree of operating leverage at the unting break-even point? alculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quant ? Explain what your answer tells you about a 500-unit decrease in the quantity sold. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tel about a $1 decrease in estimated variable costs.

ume that depreciation is straight-line to zero over the life of the project. Sales are projected at 000 units per year. Price per unit is $53, variable cost per unit is $27, and fixed costs are $950,00 year. The tax rate is 22 percent, and we require a return of 10 percent on this project. alculate the accounting break-even point. What is the degree of operating leverage at the unting break-even point? alculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quant ? Explain what your answer tells you about a 500-unit decrease in the quantity sold. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tel about a $1 decrease in estimated variable costs.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 21P: Your division is considering two investment projects, each of which requires an up-front expenditure...

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We are evaluating a project that costs $845,000, has an eight-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 51,000 units per year. Price per unit is $53, variable cost per unit is $27, and fixed costs are $950,000 per year. The tax rate is 22 percent, and we require a return of 10 percent on this project. Calculate the accounting break-even point. What is the degree of operating leverage at the accounting break-even point? Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quantity sold? What is the sensitivity of OCF to changes in the variable cost figure? Give typing answer with explanation and conclusion
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