Question

We are evaluating a project that costs $884,000, has a life of 9 years, and has no salvage value. assume that depreciation is straight-line to zero over the life of the project. sales are projected at 82,000 units per year. price per unit is $36, variable cost per unit is $22, and fixed costs are $887,536 per year. the tax rate is 23 percent, and we require a return of 19 percent on this project.

1a. calculate the accounting break-even point.
1b. what is the degree of operating leverage at the accounting break-even point?
2a. calculate the base-case cash flow.
2b. calculate the npv.

Answer 1

The accounting break-even point is 68,273 units. The degree of operating leverage at the accounting break-even point is 0.625. The base-case cash flow is ($36 * 82,000) - $887,536. The NPV can be calculated by discounting the projected cash flows using the required rate of return.

Step-by-step explanation:

To calculate the accounting break-even point, we need to find the quantity of units that need to be sold in order to cover the fixed costs. The formula to calculate the break-even point is: Break-Even Quantity = Fixed Costs / (Sales Price per Unit - Variable Cost per Unit). Plugging in the numbers, we get: Break-Even Quantity = $887,536 / ($36 - $22) = 68,273 units.

The degree of operating leverage (DOL) at the accounting break-even point can be calculated using the formula: DOL = Contribution Margin / Net Income. In this case, Contribution Margin = (Sales Price per Unit - Variable Cost per Unit) / Sales Price per Unit, and Net Income = Accounting Profit. Plugging in the numbers, we get: DOL = ($36 - $22) / ($36 - $22 - $22) = 0.625.

To calculate the base-case cash flow, we need to subtract the annual fixed costs from the annual revenues. The base-case cash flow is the difference between the two. In this case, the base-case cash flow is: Base-Case Cash Flow = Annual Revenues - Annual Fixed Costs = (Sales Price per Unit * Quantity of Units) - Fixed Costs = ($36 * 82,000) - $887,536.

The NPV (Net Present Value) can be calculated by discounting the projected cash flows to their present values using the required rate of return. The formula to calculate NPV is: NPV = Cash Flow / (1 + Required Rate of Return)^Year. Plugging in the numbers, we get: NPV = Base-Case Cash Flow / (1 + 0.19)^1 + Base-Case Cash Flow / (1 + 0.19)^2 + ... + Base-Case Cash Flow / (1 + 0.19)^9.