Lululemon is considering investing in new machinery that will generate sustainably created athleisure shirts and pants. The discount rate is 10%, and the initial investment that can produce either type of clothing in equipment $8 million. The machinery's economic life is 20 years and the equipment will be depreciated on a straight-line basis over the project's life and has no salvage value. The following financial information is estimated for production from the machinery:

Sales price per shirt: $70 Sales price per pant: $135 Variable Costs per shirt: $5.75 Variable Costs per pant: $10.25 Fixed Costs of production per Year (regardless of just pants/ just shirts/ or both): $160,000 Tax Rate=21%

Number of shirts sold per year: 50,100 Number of pants sold per year: 42,500

1. What is the accounting break-even level for production of a) shirts, and b) pants (treat them separately)?
2. What is the financial break-even level for production of a) shirts, and b) pants (treat them separately)?
3. What is the base-cash cash flow of the total project (i.e., accounting for both shirts and pants)?
4. What is the base-case NPV of this project?
5. Assume that your projection for price of pants, fixed costs, and variable costs of shirts were only accurate within +/- 20%. Calculate the best-case and worst-case NPV figures for the total project. Do you think Lululemon should take on this project? Why or why not?
6. What is the sensitivity of the NPV to changes in the fixed costs? Explain what your answer tells you about a $10,000 increase in projected fixed costs for pants.

Note: When calculating break-evens for each product type, view each product in isolation (e.g., for shirts, assume that all depreciation and costs are attributed to shirts and ignore all pant specific figures. This solves for a world where only shirts are produced and no pants are produced).

Note: When asked about the project level, you should be accounting for both shirt and pant production together.