7.1 Sensitivity Analysis and Break-Even Point We are evaluating a project that costs $588,000, 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 70,000 units per year. Price per unit is $36, variable cost per unit is $20, and fixed costs are $695,000 per year. The tax rate is 35 percent, and we require a return of 15 percent on this project.

a. Calculate the accounting break-even point. (I've done a, below; it's probably wrong)

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. (Walk me through this, step by step; I am ignorant, and will not get it if you just post some Excel worksheet.)

c. What is the sensitivity of OCF to changes in the variable cost figure? Explain what you answer tells you about a $1 decrease in estimated variable costs. (I've started on c, below, but can't follow the example that I have. Please walk me through the rest of it, step by step; do not use Excel, and assume that I know nothing; I don't understand "PVIFA," etc.)

a. Depreciation = $724000/8

Depreciation = $90500 per year

And the accounting breakeven is:

QA = ($850000 + 90500) / ($39 23)

QA = 58781 units

Depreciation = 588000/8

= 73500 per year

Accounting break-even:

(695000 + 73500) / (36 20)

768500 / 16

48031.25

c.

OCF new = [($36 25)(70000) 695000](.65) + .35(73500)

Figuring:

= 11*70000 695000 (.65) + 25725

= 770000 695000 (.65) + 25725

= 75000 (.65) + 25725

= 48750 + 25725

= 74475 (This is as far as I could get)