XYZ Company is a reputable manufacturer of various especially electronic items. Jay Carter, a recent MBA graduate, has been hired by the company in its finance department.

On of the major revenue-producing items manufactured by the XYZ is smartphone. The company currently has one smartphone in the market and sells has been excellent. The smartphone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current smartphone has limited features in comparison with newer models.

The company can manufacture the new smartphone for $300 each in variable costs. Fixed costs for the operation are estimated to run $5.1 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 78,000, and 54,000 unit per year for the next five years, respectively.

The unit price of the new smartphone will be $485. The necessary equipment can be purchased for $31 million and will be depreciated on a seven-year MACRS schedule (Use Table A-1 below). It is believed the value of the equipment in five years will be $5.5 million.

Net working capital for the smartphones will be one time at $5,000,000 at the beginning of the project (time zero). XYZ has a 35% corporate tax rate and required return of 12%.

Jay was asked to prepare a report that answer the following questions:

1. How sensitive is the NPV to change in the price of the new smartphone (assume that the price goes done to $370)?
2. How sensitive is the NPV to change in the quantity sold (assume that quantity reduce by 10%)?

Part 2- (25 Points)

1. What is a break-even (quantity)?
2. If the total interest payment be $150,000, what are the degrees of operating and financial leverage?