# A project currently generates sales of \$11.5 million, variable costs equal to 40% of sales

March 31, 2017

Question
A project currently generates sales of \$11.5 million, variable costs equal to 40% of sales, and fixed costs of \$3.5 million. The firm’s tax rate is 40%.

The project will last for 10 years. The discount rate is 13%.

a-1.

What is the effect on project NPV, if sales increase from \$11.5 million to \$12.5 million? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

Change in cash flow \$ million

a-2.

What is the effect on project NPV, if variable costs increase to 50% of sales? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. Enter your answer as the absolute value of the change.)

Change in cash flow \$ million

b.

If project NPV under the base-case scenario is \$3.5 million, how much can fixed costs increase before NPV turns negative? (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round you answer to the nearest dollar amount.)

Increase in fixed cost \$

c.

How much can fixed costs increase before accounting profits turn negative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Increase in fixed cost \$ million

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