You are considering a new product launch. The project will cost $1,202,500, have

Question

You are considering a new product launch. The project will cost $1,202,500, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 250 units per year; price per unit will be $18,700, variable cost per unit will be $15,200, and fixed costs will be $323,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 35 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 best and worst case NPVs with these projections? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

What is the sensitivity of the NPV to changes in fixed costs? (Input the amount as a positive value. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

a)

Best-case scenario:

Step 1: Calculate the best-case variables:

Sales quantity = 250*(1+10%) = 275 units

Variable cost per unit = 15200*(1-10%) = $13680

Fixed cost =323000*(1-10%) = $290700

Step 2: Construct the Best-case Pro Forma Income State

                        Best-Case Pro Forma Income Statement

Sales 275*18700 = $5142500

Var. costs                                   275*13680 = $3762000

Fixed costs $290700

Depreciation 1202500/5 = $240500

EBIT                                           $849300

Taxes (35%) 297255

Net income                                 $552045

Step 3: Calculate OCF:

OCF = net income+ Depreciation = 552045+240500 = $792545

Step 4: Calculate the project

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