You are considering a new product launch. The project will cost $958,000, have a

Question

You are considering a new product launch. The project will cost $958,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 240 units per year; price per unit will be $18,600, variable cost per unit will be $15,100, and fixed costs will be $322,000 per year. The required return on the project is 14 percent, and the relevant tax rate is 40 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 values for each of the projections? (Do not round intermediate calculations. Round your answers to the nearest whole number (e.g., 32)

What are the best- and worst-case OCFs and 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).)

Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent.

Explanation / Answer

It is not clear whether Depreciation included in given Fixed Cost or Not, we have assumed that depreciation is not included in fixed cost $322000 hence calculated sepretaly 958000/4 =$239500

Calculation of OCF

Calculation of NPV-

OCF AND NPV AT FIXED COST 332000

Sensitivity to Fixed Cost-

At Zero NPV, 0 =(Annual Cashflow*Sum of PVF)-INITIAL OUTFLOW

0 = (Annual OCF*2.3216) -958000

OCF =958000/2.3216= $412646.47

Fixed Cost =311650

Scenario Unit Sales Varriable Cost Fixed Cost Base Case 240 $15,100.00 $322,000.00 Best Case 264 $13,590.00 $289,800.00 Worst Case 216 $16,610.00 $354,200.00

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