Problem:
We are evaluating a project that costs $1,675,000, has a six-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 91,000 units per year. Price per unit is $35.95, variable cost per unit is $21.40, and fixed costs are $775,000 per year. The tax rate is 35 percent, and we require a return of 11 percent on this project.
Required:
Question 1: What is the sensitivity of NPV to changes in the sales figure?
Question 2: What is the sensitivity of OCF to changes in the variable cost figure?
Note: Be sure to show how you arrived at your answer.