You are considering a new product launch. The project will cost $857,000, have a
ID: 2742461 • 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? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).) NPVbest $ NPVworst $ (b) What is the base-case NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPVbase $
Requirement 2: What is the sensitivity of the NPV to changes in fixed costs?
Explanation / Answer
cost of the project=$857000
life=4 years
Sales 180* $19,200=$3456000
less: Variable Cost 180*$15100=$2718000
Contribution $738000
Less:Fixed Cost(Assumed Exclds Dep.) $345000
EBIDT $393000
Less:Depreciation(857000/4) ($214250)
EBIT $ 178750
less:Tax @ 34% ( $60775)
EAT $117975
ADD:Depreciation $214250
Cash Inflow $332225
Present Value Of Cash Inflow=$332225* PVAF,11%,4YEARS=$1144083
NPV=Present Value Of Cash Inflow- Present Value of Cash Outflow=$1144083-$857000=$287083 (Base NPV)
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