1. Sensitivity Analysis (8 points) Consider the project where the initial cost is $200,000, and the project has a 5-year life. There is no salvage. Depreciation is straight-line (Depreciation = 200,000/5 = 40,000) . Unit Sales = 6000, Price per unit = $80 (Sales = 6,000 x 80) Variable cost per unit = $60 (Variable Costs = 6,000 x 60) The required return is 12%, and the tax rate is 21% . What are the cash flow each year, NPV and IRR in each case, if we changed fixed costs only? Scenario Fixed Costs Base case $50,000 Worst case 55,000 Best case 45,000 Show all work as follows: Step 1: Complete the income statement for each case: Base Worst Best Sales $480,000 $480,000 $480,000 Variable Costs 360,000 360,000 360,000 Fixed Costs 50,000 55,000 45,000 Depreciation 40,000 40,000 40,000 EBIT 30,000 Taxes (21%) 6,300 Net Income 23,700 Step 2: Use the income statement data to calculate the OCF for each case Step 3: Complete the project cash flow for each case: Year 0 1 2 3 4 5 OCF OCF OCF OCF OCF OCF Change in NWC 0 O NCS 200,000 Total 200,000 ? ? Step 4: Calculate the NPV and IRR for each case2. Break-Even Analysis (5 points) A project requires an initial investment of $1,000,000 and is depreciated straight-line to zero salvage over its 10-year life. The project produces items that sell for $1,000 each, with variable costs of $700 per unit. Fixed costs are $350,000 per year. a) What is the accounting break-even quantity? . Q = (FC + D)/(P -v) b) What is the operating cash flow (OCF) at accounting break-even quantity? . OCF= [PQ - vQ - FC - D] + D c) What is the cash break-even quantity? Q = (FC + OCF)/(P - v); where OCF=0 d) What is the financial break-even quantity if the interest rate is 10%? Find OCF where NPV = 0 Q = (OCF + FC) / (P -v) Show all work as follows: Identify: . FC = Fixed Cost D = Depreciation P = Price v = variable cost per unit OCF = operating cash flow (if needed) Then compute the break-even quantities (Q) using the corresponding formula.3. Degree of Operating Leverage (3 points) A project has a fixed costs of $2,500 and variable cost per unit of $10.15. The depreciation expense is $1,100. The operating cash flow is $6,400. What is the degree of operating leverage? Show all work as follows: Identify: FC = Fixed Cost . OCF = Operating Cash Flow Then compute the degree of operating leverage (DOL). DOL = 1 + (FC / OCF)