Question

In: Finance

Project Analysis: You are considering a new product launch. The project will cost $760,000, have a...

Project Analysis: You are considering a new product launch. The project will cost $760,000, have a four year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 420 units per year; price per unit will be $17,200; variable cost per unit will be $14,300; and fixed costs will be $640,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 35 percent.

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.

c. What is the accounting break even level of output for this project?

Solutions

Expert Solution

0 1 2 3 4
Investment -760,000
Sales 7,224,000 7,224,000 7,224,000 7,224,000
VC -6,006,000 -6,006,000 -6,006,000 -6,006,000
FC -640,000 -640,000 -640,000 -640,000
Depreciation -190,000 -190,000 -190,000 -190,000
EBT 388,000 388,000 388,000 388,000
Tax (35%) -135,800 -135,800 -135,800 -135,800
Profit 252,200 252,200 252,200 252,200
Cash Flows -760,000 442,200 442,200 442,200 442,200
NPV $502,471.43

The above is the base case NPV.

In best case scenario, Unit sales = 420 x 1.10 = 462, VC = 0.9 x 14,300 = 12,870, FC = 640,000 x 0.9 = 576,000

=> NPV = $2,073,277.67

In worst case scenario, unit sales = 420 x 0.9 = 378, VC = 1.1 x 14,300 = 15,730, FC = 640,000 x 1.1 = 704,000

=> NPV = -845,423.81

b) Sensitivity to fixed cost can be calculated by calculating change in NPV increasing FC by $1

If FC = 640,001 => NPV = $502,469.58

=> Sensitivity = $1.86 - difference in NPV.

c) Accounting break even level = (FC + Depreciation) / (P - VC) = (640,000 + 190,000) / (17,200 - 14,300) = 286


Related Solutions

13. Project Analysis You are considering a new product launch. The project will cost $760,000, have...
13. Project Analysis You are considering a new product launch. The project will cost $760,000, have a four-year life, and have no salvage value; depreciation is straightline to zero. Sales are projected at 420 units per year; price per unit will be $17,200; variable cost per unit will be $14,300; and fixed costs will be $640,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 35 percent. a. Based on your experience,...
You are considering a new product launch. The project will cost $760,000, have a 4-year life,...
You are considering a new product launch. The project will cost $760,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 450 units per year; price per unit will be $17,800, variable cost per unit will be $14,500, and fixed costs will be $740,000 per year. The required return on the project is 13 percent, and the relevant tax rate is 24 percent. a. The unit sales, variable cost, and fixed...
You are considering a new product launch. The project will cost $760,000, have a 4-year life,...
You are considering a new product launch. The project will cost $760,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 450 units per year; price per unit will be $17,800, variable cost per unit will be $14,500, and fixed costs will be $740,000 per year. The required return on the project is 13 percent, and the relevant tax rate is 24 percent.    a. The unit sales, variable cost, and...
You are considering a new product launch. The project will cost $1,750,000, have a four-year life,...
You are considering a new product launch. The project will cost $1,750,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 220 units per year; price per unit will be $20,000, variable cost per unit will be $13,000, and fixed costs will be $500,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 34 percent.    a. The unit sales, variable cost, and...
You are considering a new product launch. The project will cost $680,000, have a four-year life,...
You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation. a. Calculate...
You are considering a new product launch. The project will cost $1,950,000, have a 4-year life,...
You are considering a new product launch. The project will cost $1,950,000, have a 4-year life, and have no salvage value; depreciation is straight-line to 0. Sales are projected at 180 units per year; price per unit will be $24,000; variable cost per unit will be $15,000; and fixed costs will be $540,000 per year. The required return on the project is 10%, and the relevant tax rate is 34%. a. Based on your experience, you think the unit sales,...
You are considering a new product launch. The project will cost $2,300,000, have a four-year life,...
You are considering a new product launch. The project will cost $2,300,000, 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 $30,000, variable cost per unit will be $18,500, and fixed costs will be $610,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 36 percent. a. The unit sales, variable cost, and fixed...
You are considering a new product launch. The project will cost $1,282,500, have a five-year life,...
You are considering a new product launch. The project will cost $1,282,500, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 410 units per year; price per unit will be $20,300, variable cost per unit will be $16,800, and fixed costs will be $339,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 30 percent. Based on your experience, you think the unit...
You are considering a new product launch. The project will cost $1,500,000, have a four-year life,...
You are considering a new product launch. The project will cost $1,500,000, 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 $18,000, variable cost per unit will be $10,500, and fixed costs will be $450,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 30 percent.    a. Based on your experience, you think...
You are considering a new product launch. The project will cost $1,006,000, have a four-year life,...
You are considering a new product launch. The project will cost $1,006,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 360 units per year; price per unit will be $19,800, variable cost per unit will be $16,300, and fixed costs will be $334,000 per year. The required return on the project is 14 percent, and the relevant tax rate is 40 percent. Based on your experience, you think the unit...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT