We are evaluating a project that costs $786,000, has an 8-year life and 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 effective tax rate is 22% and we require a return of 10% on this project.

1. 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 us about a 500-unit decrease in the quantity sold.(Hint: use the tax shield approach to calculate OCF)