19. Project Analysis [LO1, 2,3, 4] You are considering a new product launch. The

Question

19. Project Analysis [LO1, 2,3, 4] You are considering a new product launch. The project will cost $1,750,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 190 units per year, price per unit will be S17,300, variable cost per unit will be $10,400, and fixed costs will be $515,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 35 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? b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. C. What is the cash break-even level of output for this project (ignoring taxes)? d. What is the accounting break-even level of output for this project? What is the degree of operating leverage at the interpret this number? accounting break-even point? How do you

Explanation / Answer

Answer :- Project cost = $1750000

No. of year = 4 , Sales Unit = 190 unit /year

Sales price = $ 17300

variable Cost = $ 10400

Contribution = $6900

Contribution Per Annum = $6900*190 = $13,11,000

Less : Fixed Cost Expenses# = $ 515000 (It is assumed That deprication is also included in Fixed cost)

Profit = $796000

Less : Tax 35% = $278600

Proft After Tax = $517400

Add: Deprication = $ 437500

Net Cash Flow = $ 954900

Pvaf (12%, 4 Yrs) = 3.037

Present Value total for 4 yrs = $2900365

Less :- Initial Investment = $1750000

NPV = $11,50,365

In Best Case

If unit sales Increases 10% = 209 Unit

Contribution per Unit =-$6900

Total contribution = $1442100

Less Fixed Cost =$515000

Profit before tax =$ 927100

less : Tax = $ 324485

Profit After tax =$602615

Deprication $437500

Net cash inflow = $1040115

Pvaf (12%,4yrs ) 3.037

discounted Cash Flow = $3158829

Less : cash outflow = $ 1750000

NPV = $1408829

Decrease In Variable Cost = 10%

so increase in contribution by 10% = $6900*1.1 =$7590 *190 = $1442100

profit before Tax = $927100 Profit After Tax = $927100*.65 =$602615

Npv = $1040115*3.037 - $1750000 = $ 140919

In the Case of fixed Cost = 10% cost will be reduced in fixed cost = $463500

In the case of Worst

Unit will reduced to = 171 Units , then calculate npv as calculated above

Fixed Cost will Increase to = $566500

Increase in Variable cot per Unit = $11440

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