We are evaluating a project that costs $1,080,000, has a ten-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 52,000 units per year. Price per unit is $50, variable cost per unit is $30, and fixed costs are $756,000 per year. The tax rate is 35 percent, and we require a return of 15 percent on this project.
a. Calculate the accounting break-even point.
b-1 Calculate the base-case cash flow and NPV.
b-2 What is the sensitivity of NPV to changes in the sales figure?
b-3 Calculate the change in NPV if sales were to drop by 500 units.
c. What is the sensitivity of OCF to changes in the variable cost figure?