In: Finance
You are considering a new product launch. The project will cost
$1,850,000, have a four-year life, and have no salvage value;
depreciation is straight-line to zero. Sales are projected at 180
units per year; price per unit will be $22,000, variable cost per
unit will be $14,000, and fixed costs will be $520,000 per year.
The required return on the project is 12 percent, and the relevant
tax rate is 36 percent.
a. The unit sales, variable cost, and fixed cost
projections given above 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. Calculate the sensitivity of your base-case NPV to changes in fixed costs.
c. What is the accounting break-even level of output for this project?