Problem:
We are evaluating a project that costs $660,000, has a five-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 69,000 units per year. Price per unit is $58, variable cost per unit is $38, and fixed costs are $660,000 per year. The tax rate is 35 percent, and we require a 12 percent return on this project.
Required:
Question 1: Calculate the accounting break-even point per unit?
Question 2: Calculate the base-case cash flow and NPV?
Question 3: What is the sensitivity of NPV to changes in the sales figure?
Question 4: What is the sensitivity of OCF to changes in the variable cost figure?
Note: Provide support for rationale.