$2($RWJ Fundamentals $9$ed $11-4,5,6)[$Scenario Analysis, Sensitivity Analysis

and Break$-$Even$]$ We are evaluating a project that costs $$724,000,$ has an $8$

year life, and has no salvage value. Assume straight$-$line depreciation to zero

over the life of the project. Projected sales are $90,000$ units per year. Price

per unit is $$43,$ variable cost per unit is $$29,$ and xed costs are $$780,000$

per year. Tax rate is $35\%,$ and we require a $15\%$ return on this project.

$1$ Calculate the accounting break$-$even point. What is the degree of

operating leverage at the accounting break$-$even point?

$2$ If the projections for price, quantity, variable costs, and xed costs are

all accurate to within $10\%.$ Calculate the best$-$ and worst$-$case NPVs$.$

$3$ Suppose management is most concerned about the impact of its sales

gure estimate on the project's protability. How could you address

this concern? Describe how you would calculate your answer. What

values would you use for the other forecast variables?

$4$ Calculate the base$-$case OCF and NPV$.$ What is the sensitivity of NPV

to changes in sales? What does this tell you about a $500-$unit

decrease in projected sales.

$5$ What is the sensitivity of OCF to changes in variable cost? What does

this tell you about a $$1$ decrease in estimated variable costs.