Sensitivity Analysis and Break-Even [LO1, 3] We are evaluating a project that costs $864,000, has an eight-year life, and has no salvage value. Assume that
a. Calculate the accounting break-even point. What is the degree of operating leverage at the accounting break-even point?
b. Calculate the base-case cash flow and
c. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs.
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Fundamentals of Corporate Finance (Special Edition for Rutgers Business School)
- A3 8avi You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation. a. Calculate the following six numbers for this project. Round your answers to two decimal places. (vi) Average Accounting Return (AAR in %) Hint: Net Income = {[(Price – variable cost)*Quantity Sold] – Fixed Costs – Depreciation} * (1 – Tax rate)arrow_forwardWe are evaluating a project that costs $800,000, 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 60,000 units per year. Price per unit is $40, variable cost per unit is $21, and fixed costs are $800,000 per year. The tax rate is 21 percent, and we require a return of 10 percent on this project. c. What is the sensitivity of OCF to changes in the variable cost figure?.arrow_forwardA3 8av You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation. a. Calculate the following six numbers for this project. Round your answers to two decimal places. (v) Internal Rate of Return (IRR in %)arrow_forward
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- use excel/show all excel formulas answering the following LO3 20. Sensitivity Analysis We are evaluating a project that costs $1.68 million, has a six-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 90,000 units per year. Price per unit is $37.95, variable cost per unit is $23.20, and fixed costs are $815,000 per year. The tax rate is 21 percent, and we require a return of 11 percent on this project. a. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales. b. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs. LO3 21. Scenario Analysis In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to…arrow_forward3. A firm is considering a project which would require the purchase of $1mm in equipment, which would be on a 10 yr. straight line depreciation schedule. This would generate $1.6mm in EBIT for each of the next 5 years. The firm's marginal tax rate is 21%. The firm would lose $90,000 in annual cash flows due to existing product sales being cannibalized The firm would sell the equipment after 5 years for $400,000. What is the project NPV, if the firm's WACC is 10%?arrow_forward1.Should the proposed project be accepted based on the profitability index (PI)? Why or why not? ________ 5. Winslow, Inc. is considering opening a new plant to produce snow skis. The initial cost of the project is $1.8 million. This cost will be depreciated straight-line to a zero-book value over the 10-year life of the project. The net income of the project is expected to be a loss of $250,000 a year for the first four years. The net income is projected at $50,000, $230,000, $390,000, $480,000, $750,000, and $800,000 for years 5 through 10, respectively. What is the average accounting return on this project?arrow_forward
- 1 Downside scenarios Consider a proposal to produce and market a new tennis racquet. The most likely outcome scenario for the project incl. Expected sales of 30,000 units per year, Unit price of $200, Variable cost per racquet of $120, Fixed cost of $1,200,000. The project will last for 10 years and requires an initial investment of $4 million, which will be depreciated straight-line over the project life to a fnal value of zero. The firm´s tax rate is 30%, and the required rate of return is 12%. 1. What is the project NPV? However, you recognize that some of these estimates are subject to error. Sales could fall 20% below expectations for the life of the project and, if that happens, the unit price would probably be only $150. The good news is that Öxed costs could be as low as $800,000, and total Variable costs1 would decline in proportion to sales. 2. What is NPV in the worst-case scenario?3. How else could you consider the downside scenario in your NPV calculation? (Answer…arrow_forwardCan i get a step by step please 4a3) KKF Inc. is considering a 3-year project with an initial cost of $755,000. The project will not directly produce any sales but will reduce operating costs by $195,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project, the equipment will be sold for an estimated $42,000. The tax rate is 30%. The project will require $28,000 in extra inventory for spare parts and accessories. Calculate the NPV. Should this project be implemented if KKF requires a 10% rate of return? Why or why not?arrow_forwardA project costs $2.43 million and has no salvage value. Depreciation is straight-line to zero over the five-year life of the project. Sales are projected at 64,000 units per year, price per unit is $73.29, variable cost per unit is $42.93, and fixed costs are $623,000 per year. The tax rate is 35 percent, and the required rate of return is 9.6 percent. What is the sensitivity of NPV to a 100-unit increase in the sales figure?arrow_forward
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