We are evaluating a project that costs $1,610,000, has a seven-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 87,500 units per year. Price per unit is $34.50, variable cost per unit is $20.75, and fixed costs are $755,000 per year. The tax rate is 40 percent, and we require a return of 12 percent on this project.
Requirement 1:
What is the sensitivity of NPV to changes in the sales figure?
Requirement 2:
If there is a 500-unit decrease in projected sales, how much would the NPV drop?
Requirement 3:
What is the sensitivity of OCF to changes in the variable cost figure?
Requirement 4:
If there is $1 decrease in estimated variable costs, how much would the increase in OCF be?