You are considering a new product launch. The project will cost $1,950,000, have

Question

You are considering a new product launch. The project will cost $1,950,000, 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 $24,000, variable cost per unit will be $15,000, and fixed costs will be $540,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 34 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?(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 $1,950,000, 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 $24,000, variable cost per unit will be $15,000, and fixed costs will be $540,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 34 percent.

Explanation / Answer

Workings

Part 2

Workings

To calculate the sensitivity of the NPV to changes in fixed costs, we choose another level of fixed costswe sahll assume 10% increase

Part 3

Scenario Unit Sales Variable Cost Fixed Costs NPV   Base 180 15000 540000 834885   Best 180*1.10 198 13500 486000 1908138   Worst 180*.90 162 16500 594000 -125394

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