5. 5.

Sensitivity analysis and break-even [LO 11.1, 11.3] We are evaluating a project that costs $786 000, 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 65 000 units per year.

Price per unit is $48, variable cost per unit is $25 and fixed costs are

$725 000 per year. The tax rate is 30 per cent and we require a return of 10 per cent on this project.

1. Calculate the accounting break-even point. What is the degree of operating leverage at the accounting break-even point?

2. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quantity sold? Explain what your answer tells you about a 500-unit decrease in the quantity sold.

3. 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.