You are considering a new product launch. The project will cost $1,700,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 140 units per year; price per unit will be $22,000, variable cost per unit will be $12,500, and fixed costs will be $490,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 32 percent.
a. Evaluate the sensitivity of your base-case NPV to changes in fixed costs.
b. What is the cash break-even level of output for this project (ignoring taxes)?
c. What is the accounting break-even level of output for this project?
d. What is the degree of operating leverage at the accounting break-even point?