Question

A project that costs $2,100,000, has a 7-year life, and has no salvaging value. Assuming that depreciation straight line to zero over the life of this project. Sales are projected at 98,600 units per year. Price per unit is $37.79, variable cost per unit is $23.90, and fixed costs are $857,000 per year. The tax rate is 24 percent, and we require a return of 10 percent on this project.

A. Calculate the base case operating cash flow and NPV

B. sensitivity of NPV to changes in the sales figure

C. if there is 500 unit decrease in sales how much would NPV change

D sensitivity of OCF to change in the variable cost figures

E. if there was a $1 decrease in esatimated variable costs how much would the OCF Change.

Answer 1

The base case operating cash flow for the project is $1,263,954.60 and the NPV is $198,372.03.

Step-by-step explanation:

The base case operating cash flow can be calculated by subtracting the variable cost per unit from the price per unit to get the contribution margin per unit, multiplying it by the projected sales units, and then subtracting the fixed costs. So, for this project, the base case operating cash flow would be:

(37.79 - 23.90) * 98,600 - 857,000 = $1,263,954.60

The Net Present Value (NPV) can be calculated by discounting the cash flows using the required return rate and summing them up. The NPV for this project can be calculated as follows:

NPV = Base Case Operating Cash Flow / (1 + Required Return Rate)^n - Initial Cost

Where n is the number of years. So, for this project, with a 10% required return rate and a 7-year life:

NPV = 1,263,954.60 / (1 + 0.10)^7 - 2,100,000 = $198,372.03