Reference no: EM132753436

Use the following base case information to evaluate the project:

Firm A has a project costs $900,000, has a five-year life, and has a salvage value of $130,000. Depreciation is straight-line to zero. The required return is 14% and tax rate is 34%. Sales are projected at 2350 units per year. Price per unit is $400. Variable cost per unit is $200 and fixed costs are $150,000 per year. It is known that the depreciation expense is $180,000 per year. The engineering department estimates you will need an initial net working capital investment of $50,000.

a. Scenario Analysis

Suppose you think that the unit sales, price, variable cost, and fixed cost projections given are accurate to within 7%.

1. What are the upper and lower bounds for these projections?

2. What is the base-case NPV?

3. What are the best- and worst- case scenario NPVs?

b. Sensitivity Analysis

What is the sensitivity of OCF to changes in the variable cost figure at base case?

c. Break-Even Analysis

Given the base-case projections in the previous problem, what are the cash, accounting, and financial break-even sales levels for this project?

d. Operating Leverage

What is the degree of operating leverage at base case?