Which variable has higher forecasting risk

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Reference no: EM131332975

Sensitivity analysis

We are evaluating a project that costs $864,000, has an eight-year life, and has no salvagevalue. Assume that depreciation is straight-line to zero over the life of the project. Sales areprojected at 71,000 units per year. Price per unit is $49, variable cost per unit is $33, and fixedcosts are $765,000 per year. The tax rate is 35 percent, and we require a return of 10 percent onthis project.

In the above problem, suppose the projections given for price, quantity, variable costs, andfixed costs are all accurate to within +/- 12 percent. Perform sensitivity analysis on variable costper unit and fixed costs. Which variable has higher forecasting risk?

Reference no: EM131332975

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