Question

You are considering a new product launch. The project will cost $2,000,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per year; price per unit will be $25,000, variable cost per unit will be $15,500, and fixed costs will be $550,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 32 percent. (Do not round intermediate calculations.)

  

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? (Negative amount should be indicated by a minus sign. Round your NPV answers to 2 decimal places. (e.g., 32.16))

Scenario	Upper bound	Lower bound
Unit sales			units
Variable cost per unit	$	$
Fixed costs	$	$

Scenario	NPV
Best-Base	$
Best-case	$
Worst-case	$

  

b.	Calculate the sensitivity of your base-case NPV to changes in fixed costs. (Negative amount should be indicated by a minus sign. Round your answer to 3 decimal places. (e.g., 32.161))

  

ΔNPV/ΔFC

$

      

c.	What is the accounting break-even level of output for this project? (Round your answer to nearest whole number. (e.g., 32))

  

Accounting break-even

units

   

Answer 1

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