23 Jul WHAT IS THE DEGREE OF OPERATING LEVERAGE AT THE ACCOUNTING BREAK-EVEN POINT?
Proj Show more BB Co. is considering a new product. The proposal is as follows: Project cost: $2000000 Project life: 5 yrs Salvage value: zero Depreciation: straight line to zero Sales projection: 180 units per year Price per unit: $20000 Variable cost per unit will be: $12400 Fixed costs per year: $490000 Required return on the project: 10% Relevant tax rate: 35% Based on our past experience the unit sales variable costs and fixed cost projections are probably accurate to within plus or minus 10% A] What are the upper and lower bounds for these projections? B] What is the base case NPV? C] What are the best case NPV and the worst case NPV scenarios? D] Evaluate the sensitivity of your base-case NPV to changes in fixed costs. E] What is the cash break-even level of output for this project (ignoring taxes)? F] What is the accounting break-even level of output for this project? What is the degree of operating leverage at the accounting break-even point? How do you interpret this number? Show less
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