You manufacture face masks. Sales are projected at 15,500 face masks per year over the next four years. It will cost you $44,000 to install the equipment necessary to start production; youll depreciate this cost straight-line to zero over the projects life. You estimate that, in four years, this equipment can be salvaged for $32,000. Your fixed production costs will be $65,000 per year, price per unit is $7, and your variable production costs should be $1.50 per unit ($0.50 per unit in variable material costs and $1 per unit in variable labor expense). You also need an initial investment in net working capital of $90,000. You require a return of 9 percent on your investment. Ignore taxes (tax rate is 0%).

You believe that estimates for units sales, unit price, unit variable costs and fixed costs are accurate only to within -/+15 percent.

For this project, graphs of NPV for same percentage changes in the base case values in units sales, price per unit, variable cost and fixed costs are given. Which of the following is true? Here is the graph:

Sensitivity Analysis 150000 100000 50000 o -40% -30% -20% 10% 0% 10% 20% 30% 40% -50000 - 100000 units sales price per unit variable cost fixed costs o The degree of forecasting risk is the highest for units sales. Since the line with the steepest slope is the price per unit, the NPV is most sensitive to changes in this variable. Therefore, it deserves the most attention. O Since the line for the variable cost and fixed cost have negative slopes, the NPV is most sensitive to changes in these variables. Therefore, they deserve the most attention. Since the line with the most flat slope is the variable cost, the NPV is most sensitive to changes in this variable. Therefore, it deserves the most attention. The degree of forecasting risk is the highest for fixed costs