course hero 9 - Sensitivity Analysis and Break Even We are...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Sensitivity Analysis and Break Even: We are evaluating a project that costs $936,000, has an eight-year life, and has no salvage value. Assume that the depreciation is straight-line to zero over the life of the project. Sales are projected at 100,000 units per year. Price per unit is $41, variable cost per unit is $26, and fixed costs are $850,000 per year. The tax rate is 35%, and we require a 15 percent return on this project. a.Calculate the accounting break-even point. What is the degree of operating leverage at the accounting break-even point? b.Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales. c.What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs. Accounting break even point = Fixed Cost + Depreciation / Contribution Margin per unit = $850000 + $117000/ $41 - $26 = 64467units. Depreciation = $936000 - $0 / 8 = $117000
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern