Reference no: EM132699188
We are evaluating a project that costs $975,000, has a life of 7 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 152,000 units per year. Price per unit is $42, variable cost per unit is $22, and fixed costs are $992,550 per year. The tax rate is 22 percent, and we require a return of 14 percent on this project.
1a. Calculate the accounting break-even point.
1b. What is the degree of operating leverage at the accounting break-even point?
2a. Calculate the base-case cash flow.
2b. Calculate the NPV.
2c. What is the sensitivity of NPV to changes in the quantity sold?
2d. What your answer tells you about a 500-unit decrease in the quantity sold?
3a. What is the sensitivity of OCF to changes in the variable cost figure?
3b. How much will OCF change if variable costs decrease by $1?
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