## [solution]: 5. Sensitivity Analysis and Break-Even [LO1, 3] We are evaluating a project that costs \$924,000,...

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5.        Sensitivity Analysis and Break-Even [LO1, 3] We are evaluating a project that costs \$924,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 75,000 units per year. Price per unit is \$46, variable cost per unit is \$31, and fixed costs are \$825,000 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. What is the degree of operating le- verage at 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.

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