The project will cost $680,000 and will have a four year life and have no salvage value; depreciation is straight line to zero. Sales are projected at 160 units per year; price per unit will be $19,000; variable cost per unit will be $14,000 and fixed costs will be $150,000 per year. The required return on the project is 15% and the relevant tax rate is 35%. Assume all sales, VC and FC are cash costs.
(a) Based on your experience you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within +- 10% . What are the upper and lower bounds for these projections? What is the base case NPV? What are the best case and worst case NPV scenarios?
(b) Evaluate the sensitivity of your base case NPV to changes in fixed costs? (assume fixed costs increase to $160,000).
(c) What is the cash flow break-even level of output (units) for this project (ignore taxes)?
(d) What is the accounting break even level of output (units) for this project? What is the degree operating leverage at the accounting break-even point? How do you interpret this number?
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