We are evaluating a project that costs $975,000, has a life of7 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 152,000 units per year. Price per unit is $42, variable cost per unit is $22, and fixed costs are $992,550 per year. The tax rate is 22 percent, and we require a return of 14 percenton this project.

1a.Calculate the accounting break-even point.

1b.What is the degree of operating leverage at the accounting break-even point?

2a.Calculate the base-case cash flow.

2b.Calculate the NPV.

2c.What is the sensitivity of NPV to changes in the quantity sold?

2d.What your answer tells you about a 500-unit decrease in the quantity sold?

3a.What is the sensitivity of OCF to changes in the variable cost figure?

3b.How much will OCF change if variable costs decrease by $1?