Problem:
We are evaluating a project that costs $841,000, has an 11-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 139,000 units per year. Price per unit is $38, variable cost per unit is $29, and fixed costs are $848,569 per year. The tax rate is 35 percent, and we require a 18 percent return on this project.
Required:
Question 1: Calculate the accounting break-even point
Question 2: What is the degree of operating leverage at the accounting break-even point?
Question 3: Calculate the base-case cash flow.
Question 4: Calculate the NPV
Question 5: What is the sensitivity of NPV to changes in the sales figure?
Question 6: What your answer tells you about a 500-unit decrease in projected sales?
Question 7: What is the sensitivity of OCF to changes in the variable cost figure?
Question 8: What your answer tells you about a $1 decrease in estimated variable costs?
Note: Explain all steps comprehensively.