Question

You are considering a new product launch. The project will cost $950,000, have a 5-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 340 units per year; price per unit will be $15,945, variable cost per unit will be $11,950, and fixed costs will be $620,000 per year. The required return on the project is 9 percent, and the relevant tax rate is 22 percent. 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 best-case and worst-case values for each of the projections? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) What are the best-case and worst-case OCFs and NPVs with these projections? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) What are the base-case OCF and NPV? (Do not round intermediate calculations. Round your OCF answer to the nearest whole number, e.g., 32, and round your NPV answer to 2 decimal places, e.g., 32.16.) What are the OCF and NPV with fixed costs of $630,000 per year? (Do not round intermediate calculations. Round your OCF answer to the nearest whole number, e.g., 32, and round your NPV answer to 2 decimal places, e.g., 32.16.) What is the sensitivity of your base-case NPV to changes in fixed costs? (Enter your answer as a positive value. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

	0	1	2	3	4	5
Investment	-950,000
Sales		5,421,300	5,421,300	5,421,300	5,421,300	5,421,300
VC		-4,063,000	-4,063,000	-4,063,000	-4,063,000	-4,063,000
FC		-620,000	-620,000	-620,000	-620,000	-620,000
Depreciation		-190,000	-190,000	-190,000	-190,000	-190,000
EBT		548,300	548,300	548,300	548,300	548,300
Tax (22%)		-120,626	-120,626	-120,626	-120,626	-120,626
Profits		427,674	427,674	427,674	427,674	427,674
OCF	-950,000	617,674	617,674	617,674	617,674	617,674
NPV	$ 1,452,536.45

The above is the base case scenario.

Best case values: Unit Sales = 340 x (1 + 10%) = 374, VC = 11950 x (1 - 10%) = 10,755, FC = 620,000 x (1 - 10%) = 558,000

	0	1	2	3	4	5
Investment	-950,000
Sales		5,963,430	5,963,430	5,963,430	5,963,430	5,963,430
VC		-4,022,370	-4,022,370	-4,022,370	-4,022,370	-4,022,370
FC		-558,000	-558,000	-558,000	-558,000	-558,000
Depreciation		-190,000	-190,000	-190,000	-190,000	-190,000
EBT		1,193,060	1,193,060	1,193,060	1,193,060	1,193,060
Tax (22%)		-262,473	-262,473	-262,473	-262,473	-262,473
Profits		930,587	930,587	930,587	930,587	930,587
OCF	-950,000	1,120,587	1,120,587	1,120,587	1,120,587	1,120,587
NPV	$ 3,408,691.86

Worst case values: Unit Sales = 340 x (1 - 10%) = 306, VC = 11950 x (1 + 10%) = 13,145, FC = 620,000 x (1 + 10%) = 682,000

	0	1	2	3	4	5
Investment	-950,000
Sales		4,879,170	4,879,170	4,879,170	4,879,170	4,879,170
VC		-4,022,370	-4,022,370	-4,022,370	-4,022,370	-4,022,370
FC		-682,000	-682,000	-682,000	-682,000	-682,000
Depreciation		-190,000	-190,000	-190,000	-190,000	-190,000
EBT		-15,200	-15,200	-15,200	-15,200	-15,200
Tax (22%)		3,344	3,344	3,344	3,344	3,344
Profits		-11,856	-11,856	-11,856	-11,856	-11,856
OCF	-950,000	178,144	178,144	178,144	178,144	178,144
NPV	$   (257,081.97)