We are evaluating a project that costs $1,120,000, has a ten-year life, and has no salvage value....


We are evaluating a project that costs $1,120,000, has a ten-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 64,000 units per year. Price per unit is $50, variable cost per unit is $25, and fixed costs are $620,000 per year. The tax rate is 35 percent, and we require a return of 12 percent on this project.


a. Calculate the accounting break-even point.

b. What is the degree of operating leverage at the accounting break-even point?

c. Calculate the base-case cash flow and NPV.

d. What is the sensitivity of NPV to changes in the sales figure?

e. What is the sensitivity of OCF to changes in the variable cost figure?

Project Evaluation

In this scenario, the following concepts will be used in evaluating the project:

  • Break-even point. The break-even point is the sales level at which the operating income will be zero or contribution margins and fixed costs will be equal.
  • Degree of operating leverage. The degree of operating leverage is a measure which determines the change in operating income with change in sales.
  • Net present value. The net present value is the value at the present time of all cash flows related to a project. The present value of the cash flows are determine using the discount rate determined by the company.

Answer and Explanation: 1

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a. Calculate the accounting break-even point.

Since we are required to determine the accounting break-even point, we will also include fixed costs...

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Learn more about this topic:

Project Cost Management: Planning & Estimation


Chapter 9 / Lesson 11

The overall process of estimating, supervising, and budgeting the costs for a project is called project cost management. Learn about the definition of project cost management as well as the process of project cost planning and estimating.

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