You are considering a new product launch. The project will cost $974,000, have a

Question

You are considering a new product launch. The project will cost $974,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 280 units per year; price per unit will be $19,000, variable cost per unit will be $15,500, and fixed costs will be $326,000 per year. The required return on the project is 14 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 ±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

a. The filled table is as follows:

b. The NPV and OCF is as shown below:

Best Case NPV = 1,874,436.41, OCF = 977,957

Worst Case NPV = -474,167.22, OCF =171,545

c. The base case results are as shown below:

Base NPV = 512,940.23 and OCF = 510,325

d. The NPV and OCF when fixed costs are 336,000 is as shown below:

NPV = 494,001.10

OCF = 503,825

e.  For every dollar FC increase, NPV falls by $ 1.89

Scenario Unit Sales Variable costs Fixed Costs Base 280 15500 326000 Best 308 13950 293400 Worst 252 17050 358600

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