Consider a project with a 5-year life. The initial cost to set up the project is $100,000. This amount is to be linearly depreciated to zero over the life of the project and there is no salvage value. The required return is 12% and the tax rate is 21%.

The price per unit is $40, variable costs are $18 per unit and (tax-deductible) fixed costs are $28,000 per year. Annual units produced and sold are expected to be 5,000.

1: What is the NPV in the base case?

2: Use a 1% increase in price per unit to find the elasticity of NPV with respect to price per unit.

3: Use a 1% increase in variable costs to find the elasticity of NPV with respect to variable costs.

(Note: Since this is an increase in costs, the elasticity is negative.)

4: Use a 1% increase in annual fixed cost to find the elasticity of NPV with respect to annual fixed cost.

(Note: Since this is an increase in costs, the elasticity is negative.)

5: Use a 1% increase in annual unit produciton and sales to find the elasticity of NPV with respect to .