Assignment:
We are evaluating a project that costs $848,000, 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 62,000 units per year. Price per unit is $40, variable cost per unit is $20, and fixed costs are $625,000 per year. The tax rate is 35 percent, and we require a 20 percent return on this project.
Requirement:
Question 1: Calculate the accounting break-even point.
Question 2: What is the degree of operating leverage at the accountin g break-even point?
Question 3: Calculate the base-case cash flow and NPV.
Question 4: What is the sensitivity of NPV to changes in the sales figure?
Question 5: What is the sensitivity of OCF to changes in the variable cost figure?
Note: Explain the solution in detail.