The most likely outcomes for a particular project are estimated as follows. Unit price will be $$60,$

variable cost per unit will be $$40,$ fixed costs will be $$400,000$ and expected sales will be $35,000$

units per year. However, you recognize that some of these estimates are subject to error. Suppose that

each variable may turn out to be either $5\%$ higher or $5\%$ lower than the initial estimate. The project

will last for $20$ years and requires an initial investment of $$1\mathrm{.}4$ million, which will be depreciated

straight$-$line over the project life to a final value of zero. The firm's tax rate is $35\%$ and the required

rate of return is $15\%.$ What is project NPV in the "best$-$case scenario", that is assuming all variables

take on the best possible value? What about the worst$-$case scenario?

Modern Artifacts can produce keepsakes that will be sold for $$100$ each. Non$-$depreciation fixed

costs are $$900$ per year and variable costs per unit are $$80.$ If the project requires an initial

investment of $$4,900$ and is expected to last for $7$ years and the firm pays no taxes, what are the

accounting and NPV break$-$even levels of sales in terms of number of units sold? The initial

investment will be depreciated straight$-$line over $7$ years to a final value of zero, and the discount rate

is $10\%.$

What is the degree of operating leverage for Modern Artifacts in the previous problem when sales

are $$12,000?$ What is the degree of operating leverage when sales are $$18,000?$ Why is operating

leverage different at these two levels of sales?