You are considering a new product launch. The machine to produce the products will cost $820,000, have four-year life and zero salvage value; depreciated is straight-line to zero. Sales are projected at 450 units per year; price will be $18,000 per unit, variable costs will be $15,400 per unit, and fixed costs will be $610,000 per year. The required return on the project is 15% and the relevant tax rate is 35%. These are the base case estimates. The base-case OCF of the project is $435,750 each year.

a. What is the base-case NPV?

b. Assume that the OCF of the project is $143,250 when the variable costs increase to $16,400 per unit. Evaluate the sensitivity of your base-case NPV to changes in variable costs. Explain what your answer tells you about a $100 increase in the variable costs.