Sensitivity Analysis and Break-Even Point: We are evaluating a project that costs $644,000, has an eight-year life, and has no salvage. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 70,000 units per year. Price per unit is $37, variable cost per unit is $21, and fixed costs are $725,000 per year. The tax rate is 35 percent, and we require return on this project.
A. Calculate the accounting break-even point.
B. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales.
C. What is the sensitivity of OCF to changes in the variable cost figure? Explain your answer tells you about a $1 decrease in estimated variable costs.
Sensitivity Analysis and Break-Even Point: We are evaluating a project that costs $644,000, has an eight-year life, and has no salvage. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 70,000 units per year. Price per unit is $37, variable cost per unit is $21, and fixed costs are $725,000 per year. The tax rate is 35 percent, and we require return on this project.
A. Calculate the accounting break-even point.
B. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales.
C. What is the sensitivity of OCF to changes in the variable cost figure? Explain your answer tells you about a $1 decrease in estimated variable costs.
