You are considering a new product launch. The project will cost $1,232,500, have
ID: 2628827 • Letter: Y
Question
You are considering a new product launch. The project will cost $1,232,500, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 310 units per year; price per unit will be $19,300, variable cost per unit will be $15,800, and fixed costs will be $329,000 per year. The required return on the project is 13 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
You are considering a new product launch. The project will cost $1,232,500, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 310 units per year; price per unit will be $19,300, variable cost per unit will be $15,800, and fixed costs will be $329,000 per year. The required return on the project is 13 percent, and the relevant tax rate is 35 percent.
Explanation / Answer
base Best Worst sales 19300.00 19300 19300 Less : variable cost 15800.00 14220 17380 contribution 3500.00 5080.00 1920.00 No. of units 310.00 341 279 Total contribution 1085000.00 1732280.00 535680.00 Less : fixed cost 329000.00 296100.00 361900.00 Profit 756000.00 1436180.00 173780.00 Depreciation working cost 1232500 Life 5 per year 246500 Base case NPV year 0 1-5 investment -1232500.00 Post tax profit 491400 Tax savings due to depreciation 86275 Total -1232500.00 577675 Dcf @ 13 % 1.00 3.52 NPV -1232500.00 2033416 800916.00 Base case NPV 800916.00 Best Case NPV Unit sales +10% variable cost -10% fixed cost -10% Profit 1436180.00 year 0 1-5 investment -1232500.00 Post tax profit 933517 Tax savings due to depreciation 86275 Total -1232500.00 1019792 Dcf @ 13 % 1.00 3.52 NPV -1232500.00 3589667.84 2357167.84 Best case NPV 2357167.84 Worst Case NPV Unit sales -10% variable cost +10% fixed cost +10% Profit 173780.00 year 0 1-5 investment -1232500.00 Post tax profit 112957 Tax savings due to depreciation 86275 Total -1232500.00 199232 Dcf @ 13 % 1.00 3.52 NPV -1232500.00 701296.64 -531203.36 Worst case NPV -531203.36
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