Question: We are evaluating a project that costs $800,000, 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 60,000 units per year. Price per unit is $40, variable cost per unit is $20, and fixed costs are $800,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on this project.
a-1. Calculate the accounting break-even point.
a-2. What is the degree of operating leverage at the accounting break-even point?
b-1. Calculate the base-case cash flow and NPV.
b-2. What is the sensitivity of NPV to changes in the sales figure?
c. What is the sensitivity of OCF to changes in the variable cost figure?