We are evaluating a project that costs $1,720,000, has

a six-year life, and has no salvage value. Assume that depreciation is

straight-line to zero over the life of the project. Sales are projected at 91,000

units per year. Price per unit is $37.95, variable cost per unit is $23.20, and

fixed costs are $815,000 per year. The tax rate is 35 percent, and we require

a return of 11 percent on this project.

a. Calculate the base-case cash flow and NPV. What is the sensitivity of

NPV to changes in the sales figure? Explain what your answer tells you

about a 500-unit decrease in projected sales.

b. What is the sensitivity of OCF to changes in the variable cost figure?

Explain what your answer tells you about a $1 decrease in estimated

variable costs