Reference no: EM132588379

We are evaluating a project that costs $800,000, has an eight-year life, and has 20% salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 70,000 units per year. Price per unit is $40, variable cost per unit is $30, and fixed costs are $725,000 per year. The tax rate is 40 percent, and we require a 15 percent return on this project.

Question a) Calculate the accounting break-even point.

Question b) Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales.

Question c) What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs.

Question d) Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +- 15 percent. Calculate the best-case and worst-case NPV figures