Question

We are evaluating a project that costs $2,280,000, has a 8-year life. and has no salvage value. Assume that depreciation is straightitne to zero over the life of the project. Sales are projected at 98,300 units per year. Price per unit is $39.15, variable cost per unit is $2420, and fixed costs are $875,000 per yeat. The tax rate is 25 percent, and we require a return of 11 percent on this project.

a. Calculate the base-case operating cash flow and NPV Note: 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? Note: Do not round intermediate calculations and round your answer to 3 decimal places, e.9., 32.161.
c. If there is a 450-unit decrease in projected sales, how much would the NPV change? Note: 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? Note: 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?

Answer 1

To calculate the base-case operating cash flow, subtract the total costs from the total revenue. The NPV can be calculated by discounting the cash flows and subtracting the initial investment. The sensitivity of NPV and OCF to changes in sales and variable costs can be calculated using specific formulas.

Step-by-step explanation:

To calculate the base-case operating cash flow, we need to subtract the total costs from the total revenue. The total revenue can be calculated by multiplying the sales figure by the price per unit. The total costs can be calculated by multiplying the variable cost per unit by the sales figure, and adding the fixed costs. The net present value (NPV) can be calculated by discounting the cash flows and subtracting the initial investment.

a. The base-case operating cash flow is calculated as follows: (Sales - Variable Costs - Fixed Costs) = (98,300 * $39.15 - 98,300 * $2420 - $875,000) = $1,821,957.50. The NPV is calculated using the formula: NPV = (Cash Flow / (1 + Rate)^Year) - Initial Investment. In this case, the Year is 0 and the Initial Investment is $2,280,000. So, the NPV is (-$458,042.50).

b. The sensitivity of NPV to changes in the sales figure can be calculated by subtracting the NPV for the original sales figure from the NPV for the new sales figure, and dividing by the change in sales. In this case, the sensitivity of NPV to changes in the sales figure is (NPV new - NPV original) / (Sales new - Sales original) = (($Revenue new - Variable Cost new - Fixed Costs) - ($Revenue original - Variable Cost original - Fixed Costs)) / (Sales new - Sales original) = ($Revenue new - $Revenue original) / (Sales new - Sales original).

c. If there is a 450-unit decrease in projected sales, we can calculate the change in NPV by using the sensitivity of NPV to changes in the sales figure. In this case, the change in NPV is calculated as follows: Change in NPV = (NPV new - NPV original) = (($Revenue new - Variable Cost new - Fixed Costs) - ($Revenue original - Variable Cost original - Fixed Costs)).

d. The sensitivity of OCF to changes in the variable cost figure can be calculated by subtracting the OCF for the original variable cost figure from the OCF for the new variable cost figure, and dividing by the change in variable cost. In this case, the sensitivity of OCF to changes in the variable cost figure is (OCF new - OCF original) / (Variable Cost new - Variable Cost original).

e. If there is a $1 decrease in estimated variable costs, we can calculate the change in OCF by using the sensitivity of OCF to changes in the variable cost figure. In this case, the change in OCF is calculated as follows: Change in OCF = (OCF new - OCF original) = (($Revenue - Variable Cost new - Fixed Costs) - ($Revenue - Variable Cost original - Fixed Costs)).