1 answer

(Please show work on excel) We are evaluating a project that costs $1,68 million has a...

Question:

(Please show work on excel) 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. Calculate the base-case operating 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. (Round the answer with 2 decimals places). What is the sensitivity of OCF to changes in the variable cost figure? (A negative answer should be indicated by a minus sign.) Explain what your answer tell you If there is $1 decrease in estimated variable costs.(Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Increase in OCF $


Answers

NOTE: In case of multiple sub part only first 4 will be answered

depreciation
1680000/6= 280000
1 2 3 4 5 6 total
selling price 37.95 37.95 37.95 37.95 37.95 37.95
less: variable cost 23.2 23.2 23.2 23.2 23.2 23.2
contribution 14.75 14.75 14.75 14.75 14.75 14.75
units 90000 90000 90000 90000 90000 90000
total contribution 1327500 1327500 1327500 1327500 1327500 1327500
less: fixed cost 815000 815000 815000 815000 815000 815000
profit 512500 512500 512500 512500 512500 512500
less: depreciation 280000 280000 280000 280000 280000 280000
profit after dep 232500 232500 232500 232500 232500 232500
tax 21% 48825 48825 48825 48825 48825 48825
profit after tax 183675 183675 183675 183675 183675 183675
add: dep 280000 280000 280000 280000 280000 280000
total cash inflow 463675 463675 463675 463675 463675 463675
discount 11% 0.901 0.812 0.731 0.659 0.593 0.535 4.231
PV of Cash inflow 417771.2 376504.1 338946.4 305561.8 274959.28 248066.1 1961809
cash outflow 1680000
NPV 281808.9
Sensitivity Analysis
Variable Pessimistic Expected Optimistic
sale units 80000 90000 100000
contribution 14.75 14.75 14.75
total contribution 1180000 1327500 1475000
less: fixed cost 815000 815000 815000
profit 365000 512500 660000
less: depreciation 280000 280000 280000
profit after dep 85000 232500 380000
tax 21% 17850 48825 79800
profit after tax 67150 183675 300200
add: dep 280000 280000 280000
total cash inflow 347150 463675 580200
discount 11% 4.231 4.231 4.231
PV of Cash inflow 1468791.7 1961809 2454826
cash outflow 1680000 1680000 1680000
NPV -211208.4 281808.9 774826.2

A 500 unit decrease (90000-500=89500) decreases the NPV but it remains positive.

sale units 89500
contribution 14.75
total contribution 1320125
less: fixed cost 815000
profit 505125
less: depreciation 280000
profit after dep 225125
tax 21% 47276.25
profit after tax 177848.75
add: dep 280000
total cash inflow 457848.75
discount 11% 4.231
PV of Cash inflow 1937158.1
cash outflow 1680000
NPV 257158.06
.

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