We are evaluating a project that costs $$845,000,$ has an eight$-$year life, and has no salvage value. Assume that depreciation is straight$-$line to zero over the life of the project. Sales are projected at $51,000$ units per year. Price per unit is $$53,$ variable cost per unit is $$27,$ and fixed costs are $$950,000$ 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.

Input area:

$\backslash$table$[[$Initial cost$,$$$845,000\mathrm{.}00$

We are evaluating a project that costs $$845,000,$ has an eight$-$year life, and has no salvage value. Assume that depreciation is straight$-$line to zero over the life of the project. Sales are projected at $51,000$ units per year. Price per unit is $$53,$ variable cost per unit is $$27,$ and fixed costs are $$950,000$ 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.

$3$

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