Question
A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no salvage value. Assume depreciation is straight-line to
A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are projected at 31,000 units per year, the price per unit is $47, variable cost per unit is $23, and fixed costs are $602,900 per year. The tax rate is 21 percent and the required return is 12 percent. Suppose the projections given for price and quantity can vary by 4 percent while variable and fixed cost estimates are accurate to within 2 percent. What is the sensitivity of NPV to changes in the variable cost per unit?
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