Problem 9-23 Project Analysis [LO 2] You are considering a new product launch. T

Question

Problem 9-23 Project Analysis [LO 2]

You are considering a new product launch. The project will cost $1,006,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 360 units per year; price per unit will be $19,800, variable cost per unit will be $16,300, and fixed costs will be $334,000 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).)

You are considering a new product launch. The project will cost $1,006,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 360 units per year; price per unit will be $19,800, variable cost per unit will be $16,300, and fixed costs will be $334,000 per year. The required return on the project is 14 percent, and the relevant tax rate is 40 percent.

Explanation / Answer

a) In Best Case: Sales increase by 10% while costs decrease by 10%. In worst case, sales decrease by 10% while costs increase by 10%

b), c) Using the tax shield approach, the OCF and NPV for the base case estimate is:
OCF(base) = [($19,800 – 16,300)(360) – 334,000](0.60) + 0.40(1,006,000/4)
OCF(base)= $656,200

NPV(base) = –$1,006,000 + $656,200(PVIFA14%,4)
NPV(base) = $905,978.01

OCF(worst) = [($19,800 – 17,930)(324) – 367,400](0.60) + 0.40(1,006,000/4)
OCF(worst)= $243,688

NPV(worst) = –$1,006,000 + $243,688(PVIFA14%,4)
NPV(worst) = $ (295,963.28)

OCF(best) = [($19,800 – 14,670)(396) – 300,600](0.60) + 0.40(1,006,000/4)
OCF(best)= $1,139,128

NPV(best) = –$1,006,000 + $1,139,128(PVIFA14%,4)
NPV(best) = $2,313,091.27

d) OCF and NPV with Fixed Costs 344,000

OCF(base) = [($19,800 – 16,300)(360) – 344,000](0.60) + 0.40(1,006,000/4)
OCF(base)= $650,200

NPV(base) = –$1,006,000 + $650,200(PVIFA14%,4)
NPV(base) = $888,295.74

e) (Change in NPV in Case d wrt Case c)/Change in FC,
(888,295.74 - 905,978.01)/(10,000) = -1.75

Scenario Unit sales Variable costs Fixed costs    Base 360 $16,300 $334,000    Best   396 $14,670 $300,600    Worst 324 $17,930 $367,400

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.