Question

You are considering a new product launch. The project will cost $857,000, 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 $19,200, variable cost per unit will be $15,100, and fixed costs will be $345,000 per year. The required return on the project is 11 percent, and the relevant tax rate is 34 percent.

Requirement 1:

Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±5 percent.

(a)	What are the best and worst case NPVs with these projections? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

NPVbest	$
NPVworst	$

(b)	What is the base-case NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

NPVbase

$

Requirement 2:

What is the sensitivity of the NPV to changes in fixed costs? (Do not round intermediate calculations. Input the amount as a positive value. Round your answer to 2 decimal places (e.g., 32.16).)

For every dollar FC increase, NPV falls by $ .

Answer 1

	Base	Best	Worst	Best case comments
Units	180	189	171	Units increased by 5%
SP	19,200	19,200	19,200
Cost	15,100	14,345	15,062	Cost decreased by 5%
Contribution p u	4,100	4,855	4,138
Total Contribution	7,38,000	9,17,595	7,07,555
Fixed cost	3,45,000	3,27,750	3,62,250	Cost decreased by 5%
Net profit before tax	3,93,000	5,89,845	3,45,305
Net profit after tax	2,59,380	3,89,298	2,27,901
	1	2	3	4
Base case	2,59,380.00	2,59,380.00	2,59,380.00	2,59,380.00
Discounting Fac	0.90	0.81	0.73	0.66
Present value of inflow	2,33,675.68	2,10,518.63	1,89,656.42	1,70,861.64
Total Inflow				8,04,712.36
Total Outflow				8,57,000.00
				-52,287.64
NPV best	1	2	3	4
	3,89,298	3,89,298	3,89,298	3,89,298
Discounting Fac	0.90	0.81	0.73	0.66
Present value of inflow	3,50,718.65	3,15,962.75	2,84,651.12	2,56,442.45
				12,07,774.97
				8,57,000.00
NPV Best case				3,50,774.97
NPV worst case	1	2	3	4
	2,27,901	2,27,901	2,27,901	2,27,901
Discounting Fac	0.90	0.81	0.73	0.66
Present value of inflow	2,05,317	1,84,970	1,66,640	1,50,126
Total Inflow				7,07,051.92
Total Outflow				8,57,000.00
NPV worst case				-1,49,948.08

Sensitivity to fixed cost changes:

	Fixed cost
Units	180
SP	19,200
Cost	15,100
Contribution p u	4,100
Total Contribution	7,38,000
Fixed cost	3,62,250
Net profit before tax	3,75,750
Net profit after tax	2,47,995

NPV	1	2	3	4
	2,47,995	2,47,995	2,47,995	2,47,995
Discounting Fac	0.90	0.81	0.73	0.66
Present value of inflow	2,23,419	2,01,278	1,81,332	1,63,362
Total Inflow				7,69,391.02
Total Outflow				8,57,000.00
NPV				-87,608.98

Change	-35,321.34	(87,608 minus 52,287)
Sensitivity	68%