We are evaluating a project that costs $925,000, has a nine-year life, and a salvage value of $115,000. Assume a straight-line depreciation over the life of the project. Sales are projected at 55,000 units per year, price per unit is $63, variable costs per unit is $37, and fixed costs are $850,000 a year. The tax rate is 21% and we require a return of 10% on this project.

a) 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?

b) Suppose the projections given in price, quantity, sales figure, and fixed and variable costs, are all accurate within 10%. Calculate the best-case and worst-case NPV figures.