We are evaluating a project that costs $1,160,000, has a ten-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 44,000 units per year. Price per unit is $45, variable cost per unit is $20, and fixed costs are $645,000 per year. The tax rate is 35 percent, and we require a 20 percent return on this project.

What is the sensitivity of NPV to changes in the sales figure? (As in a one unit increase in sales leads to what change in NPV?)

10 points

QUESTION 2

Scenario Analysis

We are evaluating a project that costs $1,120,000, has a ten-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 64,000 units per year. Price per unit is $50, variable cost per unit is $25, and fixed costs are $620,000 per year. The tax rate is 35 percent, and we require a 12 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent.
Calculate the best-case and NPV

10 points

QUESTION 3

Break Even Analysis

L.J.’s Toys Inc. just purchased a $308,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its four-year economic life. Each toy sells for $23. The variable cost per toy is $10, and the firm incurs fixed costs of $279,000 each year. The corporate tax rate for the company is 40 percent. The appropriate discount rate is 10 percent.

What is the financial break-even point for the project (i.e. the number of units that makes NPV zero)? I would use goal seek for this one, but you can also work backwards per the text from the required net cash flows

Finance Academic Essay

 

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