You are considering a new product launch. The project will cost $857,000, have a four-year life,...

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?

(b)

What is the base-case NPV?

Requirement 2:

What is the sensitivity of the NPV to changes in fixed costs?

Expert Solution

jeff jeffy answered 8 months ago

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You are considering a new product launch. The project will cost $857,000, have a four-year life,...

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