You are considering a new product launch. The project will cost $1,450,000, have

Question

You are considering a new product launch. The project will cost $1,450,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per year, price per unit will be $17,000, variable cost per unit will be $10,000, and fixed costs will be $440,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 32 percent. a. 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) Scenario Unit Sales Base Best Worst Variable Cost Fixed Costs NPV 160 176 10000 9000 11000 440000 396000 484000 306820.86 992514.85 312816.4 b. 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) ANPVIAFC c. 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)) Cash break-even d-1 What is the accounting break-even level of output for this project? (Round your answer to 2 decimal places. (e.g., 32.16) Accounting break-even d-2 What is the degree of operating leverage at the accounting break-even point? (Round your answer to 3 decimal places. (e.g., 32.161)) Degree of operating leverage

Explanation / Answer

c. Cash break-even level level of output= Total fixed expense/contribution margin

=$440,000/($17000-$10000) = 62.86 or units

d2- Degree of operating leverage at the accounting break even point-

DOL= 1+ (fixed costs/Depreciation)= 1+(440,000/362,500) = 2.213

d1 Accounting Break even Details Base Case Unit sales                    160 Price per unit              17,000 Unit Variable cost              10,000 Unit Contribution Margin                7,000 Fixed cost            440,000 Add Depreciation /year=            362,500 Total Fixed cost (accounting)            802,500 BEP Units =802500/7000=                    115 units

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