A project has an initial cost of $36,000 for equipment, which will be depreciated straight-line to zero over the five-year life of the project. There is $2,000 salvage value on the equipment. No working capital is required. Sales are estimated at 10,000 units at a selling price of $32.50 per unit. Variable costs are $14.50 and total fixed costs are $56,000. The tax rate is 35% and the required rate of return is 10%.

a) For every $4 increase in the variable cost per unit (that is, we increase the variable cost from $14.5 to $18.5), what will be the change to the net present value? (7 marks)

b) If the total fixed cost increase by $10,000, what is the change to the net present value? (7 marks)