We are evaluating a project that costs $500,000, 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 50,000 units per year. Price per unit is $40, variable cost per unit is $25, and fixed costs are $600,000 per year. The tax rate is 35 percent, and we require a return of 12 percent on this project.
What is the sensitivity of NPV to changes in the sales figure? Calculate the change in NPV if sales were to drop by 500 units. What is the sensitivity of OCF to changes in the variable cost figure?