Sensitivity Analysis and Break-Even A retail clothing firm is evaluating the development of a new range of allweather coats. These coats contain an internal solar battery to provide heating whenever the garment is worn.

The solar battery cost £3.2 million to make and the expectation is that the project will last for 5 years. At the end of the project, the machinery to make the battery will be worthless because of new technological developments.

Assume that depreciation is 20 per cent 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 £2 decrease in estimated variable costs.