You are considering a new product launch. The project will cost $1,850,000, have
ID: 2492985 • Letter: Y
Question
You are considering a new product launch. The project will cost $1,850,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 180 units per year; price per unit will be $22,000, variable cost per unit will be $14,000, and fixed costs will be $520,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 36 percent.
Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios?(unit sales-variable cost-fixed costs-NPV)(Negative amount should be indicated by a minus sign. Round your NPV answers to 2 decimal places. (e.g., 32.16))
Evaluate the sensitivity of your base-case NPV to changes in fixed costs. (Negative amount should be indicated by a minus sign. Round your answer to 3 decimal places. (e.g., 32.161))
What is the cash break-even level of output for this project (ignoring taxes)? (Round your answer to 2 decimal places. (e.g., 32.16))
What is the accounting break-even level of output for this project? (Round your answer to 2 decimal places. (e.g., 32.16))
What is the degree of operating leverage at the accounting break-even point? (Round your answer to 3 decimal places. (e.g., 32.161))
You are considering a new product launch. The project will cost $1,850,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 180 units per year; price per unit will be $22,000, variable cost per unit will be $14,000, and fixed costs will be $520,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 36 percent.
Explanation / Answer
with 10% increase cash flow with 10% decreash cash flow sales 180 22000 3960000 sales 180 24200 4356000 sales 180 19800 3564000 variable cost 180 14000 2520000 variable cost 180 15400 2772000 variable cost 180 12600 2268000 contribution 1440000 contribution 1584000 contribution 1296000 dep 462500 dep 462500 dep 462500 fixed cost 520000 fixed cost 572000 572000 fixed cost 468000 468000 ebit 457500 ebit 549500 ebit 365500 tax 164700 tax 197820 tax 131580 after tax earnings 292800 after tax earnings 351680 after tax earnings 233920 dep 462500 dep 462500 dep 462500 earning after tax before dep 755300 earning after tax before dep 814180 earning after tax before dep 696420 year cash flow after tax before dep present value@12% present value of cash flow 1 755300 0.892857 674375 2 755300 0.797194 602120.5357 3 755300 0.71178 537607.6212 4 755300 0.635518 480006.8046 2294109.962 1850000 npv 444109.9615 npv with 10% increase year cash flow after tax before dep present value@12% present value of cash flow 1 814180 0.892857 726946.4286 2 814180 0.797194 649059.3112 3 814180 0.71178 579517.2422 4 814180 0.635518 517426.1091 2472949.091 1850000 npv 622949.091 npv with 10% decrease year cash flow after tax before dep present value@12% present value of cash flow 1 696420 0.892857 621803.5714 2 696420 0.797194 555181.7602 3 696420 0.71178 495698.0002 4 696420 0.635518 442587.5002 2115270.832 1850000 npv 265270.832 b base case npv change in fixed cost only b base case npv negative change in fixed cost only sales 180 22000 3960000 sales 180 22000 3960000 variable cost 180 14000 2520000 variable cost 180 14000 2520000 contribution 1440000 contribution 1440000 dep 462500 dep 462500 fixed cost 572000 fixed cost 468000 ebit 405500 ebit 509500 tax 145980 tax 183420 after tax earnings 259520 after tax earnings 326080 dep 462500 dep 462500 earning after tax before dep 722020 earning after tax before dep 788580 year cash flow after tax before dep present value@12% present value of cash flow year cash flow after tax before dep present value@12% present value of cash flow 1 722020 0.892857143 644660.7 1 788580 0.89285714 704089.286 2 722020 0.797193878 575589.9 2 788580 0.79719388 628651.148 3 722020 0.711780248 513919.6 3 788580 0.71178025 561295.668 4 722020 0.635518078 458856.8 4 788580 0.63551808 501156.846 2193027 2395192.95 1850000 1850000 npv 343027 npv 545192.948 npv at old npv 444110 npv at old npv 444109.962 change in npv -101083 change in npv 101082.986 c cash break even level of output sales 180 22000 3960000 variable cost 180 14000 2520000 contribution 1440000 dep 462500 fixed cost 520000 cash break even point fixed cost / contribution margin ratio 2701875 contributionmargin ratio 0.363636364 d accounting break even point in units fixed cost/contibution per unit 122.8125 e operating leverage sales 122.8125 22000 2701875 variable cost 122.8125 14000 1719375 contribution 982500 dep 462500 fixed cost 520000 EBIT 0 operating leverage contribution/ebit 0 here we have assumed that depreciation is excluded from fixed cost
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