Sensitivity Analysis and Break-even Point A retail clothing firm is evaluating the development of a new range of all-weather coats. These coats contain an internal solar battery to provide heating whenever the garment is worn. The solar batteries cost £3.2 million to make and the expectation is that the project will last for five years. At the end of the project, the machinery to make the batteries will be worthless because of new technological developments. Assume that depreciation is 20 per cent using the reducing balance method.

Sales are projected at 250,000 units per year. Price per battery is £10, variable cost per unit is £2.50, and fixed costs are £900,000 per year. The tax rate is 23 per cent, and we require a 13 per cent return on this project.

(a) Calculate the accounting break-even point.

(b) 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 50,000-unit decrease in projected sales.

(c) 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.