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In: Finance

You are considering a new product launch. The project will cost $2,275,000, have a four-year life,...

You are considering a new product launch. The project will cost $2,275,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 300 units per year; price per unit will be $19,400, variable cost per unit will be $13,550, and fixed costs will be $690,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 23 percent.

Scenarios

Unit Sales

Variable Cost

Fixed Cost

NPV

Base

300

1550

690,000

Best

Worst

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. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

c.         What is the cash break-even level of output for this project (ignoring taxes)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

d-1.     What is the accounting break-even level of output for this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

d-2.     What is the degree of operating leverage at the accounting break-even point?

b. ^NPV/^FC

c. Cash Break-even

d-1 Accounting Break-Even

d-2 Degree of OP Leverage

Solutions

Expert Solution

jeff jeffy answered 7 months ago
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