We are evaluating a project that costs $400,000, 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 70,000 units per year. Price per unit is $36, variable cost per unit is $20, and fixed costs are $500,000 per year. The tax rate is 35 percent, and we require a return of 14 percent on this project.
A) Calculate the accounting break-even point.
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.
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.