Sensitivity Analysis and Break-Even [LO1, 3] We are evaluating a project that costs $786,000, 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 65,000 units per year. Price per unit is $48, variable cost per unit is $25, and fixed costs are $725,000 per year. The tax rate is 22 percent, and we require a return of 10 percent on this project.

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

b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quantity sold? Explain what your answer tells you about a 500-unit decrease in the quantity sold.

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.

Scenario Analysis In the previous problem, suppose the projections are given for price, quantity, variable costs, and fixed costs are all accurate to within 10 percent. Calculate the best-case and worst-case NPV figures.

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