ou are planning to launch a new product. The product will have an initial cost of $40,500,000, assuming to continue for 10 years, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 8500 units per year; the price per unit will be $25,000, variable cost per unit will be $18,000, and fixed costs will be $1,450,000 per year. The required return on the project is 16 percent, and the relevant tax rate is 34 percent.

a) Based on your experience, you think the variable cost and fixed cost projections given here are probably accurate to within 10%, 20%, and 30% range. Check the sensitivity of NPV to these varying variable costs and fixed costs (you have to do the sensitivity analysis for all these elements separately). Which element of the production is more sensitive (to answer this question, you have to draw a graph similar to the classwork)?

b) What is the accounting break-even level of output for this project (ignoring taxes)?

c) What is the degree of operating leverage?