Eddy Ltd is considering investing in a project at a cost of N$3 000 000. The...

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Finance

Eddy Ltd is considering investing in a project at a cost of N$3000 000. The estimated economic life of the project is 5 years. Thecompany will use the straight-line method to depreciate the cost ofthe project over 5 years. The company estimates that sales willamount to 240 000 units per year at an estimated selling price ofN$40 per unit. The company expects to incur fixed overheads,excluding depreciation of N$300 000 per year and variable cost perunit is N$30. The company cost of capital is 11% and the corporatetax rate is 28%. The expected residual value of the project in 5years’ time is expected to be zero.
Required:
a) Use the sensitivity analysis to determine what the NPV of theproject would be if selling price, sales volume, and variable costper unit are increased or reduced by 10%.
b) Use break-even analysis to determine the minimum sales volumethat the company is required to achieve to break-even in terms ofNPV.

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4.2 Ratings (521 Votes)

First we calculate the basecase NPV and then vary the key drivers sales volume price per unit and variable cost per unit to do the sensitivity analysis Formula Year n 0 1 2 3 4 5 Initial investment II 3000000 Sales u 240000 240000 240000 240000 240000 Price per unit p 40 40 40 40 40 Variable cost per unit vc 30 30 30 30 30 up Revenue R 9600000 9600000 9600000 9600000 9600000 uvc Variable cost VC 7200000 7200000 7200000 7200000 7200000 Fixed cost FC 300000 300000 300000 300000 300000 II5 Depreciation D 600000 600000 600000 600000 600000 RVCFCD EBIT 1500000 1500000 1500000 1500000 1500000 EBIT1Tax rate Net income NI 1080000 1080000 1080000 1080000 1080000 Add Depreciation 600000 600000 600000 600000 600000 NID Operating Cash Flow OCF 1680000 1680000 1680000 1680000 1680000 OCFII See Answer

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Eddy Ltd is considering investing in a project at a cost of N$3000 000. The estimated economic life of the project is 5 years. Thecompany will use the straight-line method to depreciate the cost ofthe project over 5 years. The company estimates that sales willamount to 240 000 units per year at an estimated selling price ofN$40 per unit. The company expects to incur fixed overheads,excluding depreciation of N$300 000 per year and variable cost perunit is N$30. The company cost of capital is 11% and the corporatetax rate is 28%. The expected residual value of the project in 5years’ time is expected to be zero.Required:a) Use the sensitivity analysis to determine what the NPV of theproject would be if selling price, sales volume, and variable costper unit are increased or reduced by 10%. b) Use break-even analysis to determine the minimum sales volumethat the company is required to achieve to break-even in terms ofNPV.