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We are evaluating a project that costs $786,000, has an eight-year life, and has no salvage value

Finance

We are evaluating a project that costs $786,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 65,000 units per year. Price per unit is $48, variable cost per unit is $25, and fixed costs are $725,000 per year. The tax rate is 22 percent, and we require a return of 10 percent on this project.

  1. Calculate the accounting break-even point. What is the degree of operating leverage at the accounting break-even point?
  2. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quantity sold? Explain what your answer tells you about a 500-unit decrease in the quantity sold
  3. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you abut a $1 decrease in estimated variable costs.

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