Question: Sensitivity Analysis and Break-Even We are evaluating a project that cost $786 000, has an eight-year life and has no salvage value. Assume that depreciation

Sensitivity Analysis and Break-Even

We are evaluating a project that cost $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. Price per unit is $48, Variable cost per unit is $25 and fixed costs are $725000 per year. The tax rate is 30 per cent and we require a return of 10 per cent on the project.

A. Calculate the accounting break-even point. What is the degree of operating Leverage at the accounting event point?

B. Calculate the base=case cash flow and NPV. What is the sensitivity of NPV to changes in the quantity sold?

C. What is the sensitivity of OCF to changes in variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs.

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