Question: We are evaluating a project that costs $905,000, has a life of 8 years, and has no salvage value. Assume that depreciation is straight-line to

We are evaluating a project that costs $905,000, has a life of 8 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 95,000 units per year. Price per unit is $45, variable cost per unit is $27, and fixed costs are $914,955 per year. The tax rate is 24 percent, and we require a return of 18 percent on this project.

1a. Calculate the accounting break-even point.

1b. What is the degree of operating leverage at the accounting break-even point?

Calculate the base-case cash flow.

2b. Calculate the NPV.

What is the sensitivity of NPV to changes in the quantity sold?

2d. What your answer tells you about a 500-unit decrease in the quantity sold?

What is the sensitivity of OCF to changes in the variable cost figure?

How much will OCF change if variable costs decrease by $1?

3b. How much will OCF change if variable costs decrease by $1?

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