We are evaluating a project that costs $906,000, has an 11-year life, and has no salvage value. Assume that depreciation is straightline to zero over the life of the project. Sales are projected at 158,000 units per year. Price per unit is $38, variable cost per unit is $21, and fied costs are $921,402 per year. The tax rate is 31 percent, and we require a 16 percent retum on this project.

Requirement 1: Break-Even

(a)Calculate the accounting break-even point. (Do not raund your intermediatecalculations.

(b What is the degree of operating leverage at the accounting break-even point? (Do not round your intermediale calculations.|

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Requirement 2; Base-Case & NPV Sensitivity

(a]Calculate the base-case operating cash flow. (Do not round your intermediate calculations.)

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(b)Calculate the base-case NPV. (Co not round vour intermediate calculations.)

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(c)What is the sensitivity/elasticity of NPV to changes in the sales figure?

Recall from your economics class that an elasticity measures a percentage change in one variable due to a percentage change in another, So simply increase sales quantity by 1 percent, calculate the new NPV, and then calculate the percentage change in the NPV. (Do not rougd your intermediate calculations.|

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(d)Based on this sensitivity, what is the change in NPV (in dollars) if there is a 7 percent decrease in projected sales? (Do not round your intermediate calculations.

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Requirement 3; Sensitivity of OCF

(a) in addition to NPV we Can calculate the sensitivity of other things, such as OCF. What is the sensitivity of base-case OCF to changes in the variable cost? Estimate the sensitivity by increasing variable costs by 10%. (Do not round your intermediate calculations.)

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(b)Based on this sensitivity, estimate the change in OCF (in dollars) given a 10% decrease

in the variable costs? (Do not round your intermediate calculations.)

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