Part A:

Fed Ex is considering a new product launch. The project will cost $$2,000,000,$ have a $5-$year life, and have no salvage value; depreciation is straight$-$line to zero. Sales are projected at $500$ units per year, price per unit will be $$7,500,$ variable cost per unit will be $$6,000,$ and fixed costs will be $$225,000$ per year. The relevant tax rate is $21$ percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within $\backslash$pm $5\%.$ For the worst case, what is cash breakeven sales levels $($ignoring taxes$)?$

Part B:

Now, use the worst$-$case scenario from the prior problem to perform a sensitivity analysis where the initial project investment is twice the expected level. Compute and interpret the degree of operating leverage under this worst$-$case scenario sensitivity analysis.