We are evaluating a project that costs $804,000, has an eight-year life, and has no salvage value

Question:

We are evaluating a project that costs $804,000, has an eight-year life, and has no . Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 95,000 units per year. Price per unit is $41, variable cost per unit is $27, and fixed costs are $925,000 per year. The tax rate is 35 percent, and we require a 15 percent return on this project.
a. Calculate the accounting break-even point.
b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales.
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.
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...