We are evaluating a project that costs $1,440,000 has a six 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 95,000 units per year. Price per unit is $36.50, variable cost per units is $22.75, and fixed costs are $830,000 per year. The tax rate is 35 percent, and we require a 13 percent return on this project.

(a) Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500—unit decrease in projected sales.

(b) 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.