Task:
We are evaluating a project that costs $750,000, has an eight-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 159,000 units per year. Price per unit is $41, variable cost per unit is $28, and fixed costs are $753,000 per year. The tax rate is 36 percent, and we require a 16 percent return on this project.
1) The accounting break-even point is units _______.
2) The base-case cash flow is $_____ and NPV is $_____ . The sensitivity of NPV to changes in the sales figure is $ ________. If there is a 500-unit decrease in projected sales, we would expect the NPV to change by $_______ .
3) The sensitivity of OCF to changes in the variable cost figure is $_____ . Therefore, a $1 decrease in estimated variable costs results in a $_______ change in OCF.