Sensitivity Analysis and Break-Even We are evaluating a project that costs $936,000, has an eight-year life, and

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Sensitivity Analysis and Break-Even We are evaluating a project that costs $936,000, 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 100,000 units per year. Price per unit is $41, variable cost per unit is $26, and fixed costs are $850,000 per year. The tax rate is 35 percent, and we require a 15 percent return on this project.

a. Calculate the accountin1 break-even point what is the degree of operating leverage at the accounting break-even point?

b. Calculate the base-cage 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 what your answer tells you about a $1 decrease in estimated variable costs.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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Fundamentals of Corporate Finance

ISBN: 978-0077861629

8th Edition

Authors: Stephen A. Ross, Randolph W. Westerfield, Bradford D.Jordan

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