We are evaluating a project that costs $845,000, has an eight-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 51,000 units per year. Price per unit is $53, variable cost per unit is $27, and fixed costs are $950,000 per year. The tax rate is 22 percent, and we require a return of 10 percent on this project. a. Calculate the accounting break-even point. What is the degree of operating leverage at the accounting break-even point? b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quantity sold? Explain what your answer tells you about a 500-unit decrease in the quantity sold. c. 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.

\begin{tabular}{lr|} Initial cost & $845,000.00 \\ Project life & 8 \\ Units sales & 51,000 \\ Price/unit & $53.00 \\ Variable cost/unit & $27.00 \\ Fixed costs & $950,000.00 \\ Tax rate & 22% \\ Required return & 10% \\ b. New quantity for calculation & 52,000 \\ Projected sales change & (500) \\ C. New VC for calculation & $28.00 \\ Projected VC change & ($1.00) \\ \hline \end{tabular} b. Base OCF Base NPV \begin{tabular}{|r|} \hline 9.994 \\ \hline \\ \hline \end{tabular} OCF at new quantity NPV at new quantity DNPV/DQ Change in NPV for given quantity change c. OCF DOCF/DVC Change in NPV for given VC change \begin{tabular}{lr|} Initial cost & $845,000.00 \\ Project life & 8 \\ Units sales & 51,000 \\ Price/unit & $53.00 \\ Variable cost/unit & $27.00 \\ Fixed costs & $950,000.00 \\ Tax rate & 22% \\ Required return & 10% \\ b. New quantity for calculation & 52,000 \\ Projected sales change & (500) \\ C. New VC for calculation & $28.00 \\ Projected VC change & ($1.00) \\ \hline \end{tabular} b. Base OCF Base NPV \begin{tabular}{|r|} \hline 9.994 \\ \hline \\ \hline \end{tabular} OCF at new quantity NPV at new quantity DNPV/DQ Change in NPV for given quantity change c. OCF DOCF/DVC Change in NPV for given VC change