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Homework answers / question archive / A project has the following estimated data: price = $800 per unit; variable costs = $650 per unit; fixed costs = $900,000; required return = 8%; initial investment = $5,000,000; salvage value = $50,000; life = 14 years
A project has the following estimated data: price = $800 per unit; variable costs = $650 per unit; fixed costs = $900,000; required return = 8%; initial investment = $5,000,000; salvage value = $50,000; life = 14 years.
i) Computation of Financial Breakeven Point:
At financial breakeven, the project will have a zero NPV. Since this is true, the initial cost of the project must be equal to the PV of the cash flows of the project. Using this relationship, we can find the OCF of the project must be
$5,000,000 = OCF * (PVIFA 8%, 14)
OCF = $5,000,000/8.2442
OCF = $606,484.26
So,
Financial Breakeven Point = { Fixed Cost + OCF )/ Contribution per Unit
= ($900,000+$606,484.26)/($800-$650)
Financial Breakeven Point = 10,043.23
ii) Computation of Operating Cash Flow:
Operating Cash Flow (OCF) = $606,484.26
iii) Computation of Degree of Operating Leverage (DOL):
Degree of Operating Leverage (DOL) = { 1+ Fixed Cost/OCF }
= { 1+ 900,000/606,484.26 }
Degree of Operating Leverage (DOL) = 2.48
