You are considering a new product launch. The project will cost $857,000, have a
ID: 2742362 • Letter: Y
Question
You are considering a new product launch. The project will cost $857,000, 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 $19,200, variable cost per unit will be $15,100, and fixed costs will be $345,000 per year. The required return on the project is 11 percent, and the relevant tax rate is 34 percent. Requirement 1: Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±5 percent. (a) What are the best and worst case NPVs with these projections?
Explanation / Answer
Project Cost $ 857,000.00 Sales (Units) 180 Sales Price Per Unit $ 19,200.00 Variable Cost Per Unit $ 15,100.00 Fixed cost $ 345,000.00 Required Rate of Return 11% Depreciation $ 214,250.00 Base Case Best Case Worse Case Sales (Unit) 180 189 171 Sales Price Per Unit $ 19,200.00 $ 19,200.00 $ 19,200.00 Variable Cost Per Unit $ 15,100.00 $ 14,345.00 $ 15,855.00 Fixed Cost $ 345,000.00 $ 327,750.00 $ 362,250.00 Total revenue $ 3,456,000.00 $ 3,628,800.00 $ 3,283,200.00 Total Variable Cost $ 2,718,000.00 $ 2,711,205.00 $ 2,711,205.00 Fixed Cost $ 345,000.00 $ 327,750.00 $ 362,250.00 Depreciation $ 214,250.00 $ 214,250.00 $ 214,250.00 EBIT $ 178,750.00 $ 375,595.00 $ (4,505.00) Tax @ 34% $ 60,775.00 $ 127,702.30 $ - Net Income $ 117,975.00 $ 247,892.70 $ (4,505.00) Plus: Depreciation $ 214,250.00 $ 214,250.00 $ 214,250.00 Operating Cash Flow $ 332,225.00 $ 462,142.70 $ 209,745.00 Required Rate of Return 11% 11% 11% P.V Factor 11% for 4 Years 0.65873 0.65873 0.65873 NPV $ 218,846.57 $ 304,427.26 $ 138,165.32
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