We are evaluating a project that costs $864,000. 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 71,000 units per year. Price per unit is $49, a variable cost per unit is $33, and fixed costs are $765,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on project.
Calculate the accounting break-even point
Calculate the base case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure?
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.
In the previous problem. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within + 10 percent. Calculate the best case and worst-case NPV figures.