Question

We are evaluating a project that costs $788,400, has a nine-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 75,000 units per year. Price per unit is $52, variable cost per unit is $36, and fixed costs are $750,000 per year. The tax rate is 21 percent, and we require a return of 12 percent on this project. a-1. Calculate the accounting break-even point. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a-2. What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) b-1. Calculate the base-case cash flow and NPV. (Do not round intermediate calculations. Round your cash flow answer to the nearest whole number, e.g., 32. Round your NPV answer to 2 decimal places, e.g., 32.16.) b-2. What is the sensitivity of NPV to changes in the quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the sensitivity of OCF to changes in the variable cost figure? (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. )

Answer 1

a-1. The accounting break-even point is 33,442 units.

a-2. The degree of operating leverage at the accounting break-even point is 1.825.

b-1. The base-case cash flow is $148,400, and the NPV is $60,255.65.

b-2. The sensitivity of NPV to changes in the quantity sold is $12.04 per unit.

c. The sensitivity of OCF to changes in the variable cost figure is $75,000.

Step-by-step explanation:

Government land use controls play a crucial role in shaping the development and organization of urban and rural spaces.

In this financial evaluation, we are assessing a project with various financial parameters.

a-1. The accounting break-even point is calculated by dividing fixed costs by the contribution margin per unit, where the contribution margin per unit is the difference between the price per unit and the variable cost per unit. In this case, it is 33,442 units.

a-2. The degree of operating leverage at the accounting break-even point is determined by dividing the contribution margin at the break-even point by the operating income at the break-even point. It is 1.825, indicating the extent to which fixed costs are spread over contribution margin.

b-1. Base-case cash flow is calculated as the difference between total revenue and total costs, resulting in $148,400. NPV is computed using the discounted cash flows at a 12% rate, yielding $60,255.65.

b-2. The sensitivity of NPV to changes in the quantity sold is the change in NPV per unit change in quantity sold. In this case, it is $12.04 per unit.

c. The sensitivity of OCF to changes in the variable cost figure is the change in operating cash flow for a one-unit change in variable costs, amounting to $75,000.

In summary, the financial analysis provides insights into break-even points, operating leverage, cash flow, and NPV, offering a comprehensive view of the project's financial viability.

Answer 2

The question involves calculating the accounting break-even point, the degree of operating leverage, base-case cash flow, NPV, and sensitivity analysis for changes in quantity sold and variable costs for a business project evaluation.

Step-by-step explanation:

Accounting Break-Even Point and Project Evaluation

The accounting break-even point is the sales level at which a company covers all its costs without making a profit or incurring a loss. To calculate this point for the project in question, we must consider the fixed costs, the variable cost per unit, and the price per unit. With a straight-line depreciation, the annual depreciation expense is the total cost of the project divided by its useful life, which in this case, is $788,400 divided by 9 years, equaling $87,600 annually. Hence,

• Revenue at break-even = Fixed Costs + Depreciation Expense
• Price per unit x Break-even units = $750,000 + $87,600
• Break-even units = ($750,000 + $87,600) / $52

To determine the degree of operating leverage (DOL) at the accounting break-even point, we need to use the formula:

• DOL = 1 + (Fixed Costs + Depreciation Expense) / Accounting Profit

For parts b-1 and b-2, we need to calculate the base-case cash flow, which involves determining net operating profit after taxes (NOPAT) and adding back depreciation since it's a non-cash expense. After calculating the cash flow for one year, we can find the net present value (NPV) by discounting these cash flows at the required return rate of 12% over the nine-year life of the project. The sensitivity of NPV to changes in quantity sold would require us to assess how the NPV changes with different sales volumes.

Finally, to analyze the sensitivity of operating cash flow (OCF) to changes in the variable cost, we must calculate how changes in variable cost per unit affect the OCF. We adjust the variable costs accordingly and recalculate the OCF to observe the impact.