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We are evaluating a project that costs $670,000, has a life of 5 years, and has...

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We are evaluating a project that costs $670,000, has a life of 5years, and has no salvage value. Assume that depreciation isstraight-line to zero over the life of the project. Sales areprojected at 59,000 units per year. Price per unit is $44, variablecost per unit is $24, and fixed costs are $760,000 per year. Thetax rate is 23 percent and we require a return of 16 percent onthis project.

What is the sensitivity of NPV to changes in the sales figure?(Change)NPV/(change)Quantity

What is the sensitivity of OCF to changes in the variable costfigure? (change)OCF/(Change)VC

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4.3 Ratings (856 Votes)

Year Sales(unit) Revenue (Sales*Price/unit) Variable Cost (Unit*VC) Fixed Cost Depreciation (Initial Cost/5) PBT (Revenue-VC-Fixed Cost) Tax( (PBT-Depreciation)*tax rate) PAT (PBT-TAX) Discounted Present Value (PAT/1.16^year)
0 0 -670000 0 0 0 -670000 0 -670000 -670000
1 59000 2596000 1416000 760000 134000 420000 65780 354220 322018.2
2 59000 2596000 1416000 760000 134000 420000 65780 354220 292743.8
3 59000 2596000 1416000 760000 134000 420000 65780 354220 266130.7
4 59000 2596000 1416000 760000 134000 420000 65780 354220 241937
5 59000 2596000 1416000 760000 134000 420000 65780 354220 219942.8
NPV (Sum of all Present Value) 672772.5

For sales of 59000 unit NPV is 672772.5 and using the same model if sale is 50000 then NPV becomes 147369.4. So, sensitivity= change of NPV/change of quantity=(672772.5-147369.4)/(59000-50000)=$58.37

Similarly, in the above scenario OCF(PAT+Depreciation) =488220 when VC=24 and OCF=442790 when VC=25

So, sensitivity= (442790-488220)/(25-24)=$-45430
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We are evaluating a project that costs $670,000, has a life of 5years, and has no salvage value. Assume that depreciation isstraight-line to zero over the life of the project. Sales areprojected at 59,000 units per year. Price per unit is $44, variablecost per unit is $24, and fixed costs are $760,000 per year. Thetax rate is 23 percent and we require a return of 16 percent onthis project.What is the sensitivity of NPV to changes in the sales figure?(Change)NPV/(change)QuantityWhat is the sensitivity of OCF to changes in the variable costfigure? (change)OCF/(Change)VC

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