Question

In: Finance

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, variable cost, and fixed cost projections given here are probably accurate to within ±10%. 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 answers should be indicated by a minus sign. Do not round intermediate calculations. Round the final NPV answers to 2 decimal places. Omit $ sign in your response.)

Scenario Unit Sales Variable Cost Fixed Costs NPV
Base $ $ $
Best $ $ $
Worst $ $ $

b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to 3 decimal places. Omit $ sign in your response.)

ΔNPV/ΔFC           $

c. What is the cash break-even level of output for this project (ignoring taxes)? (Round the final answers to the nearest whole unit.)

Cash break–even            units

d-1. What is the accounting break-even level of output for this project? (Round the final answers to the nearest whole unit.)

Accounting break–even            units

d-2. What is the degree of operating leverage at the accounting break-even point? (Round the final answer to 4 decimal places.)

Degree of operating leverage           

Solutions

Expert Solution


Related Solutions

You are considering a new product launch. The project will cost $1,950,000, have a four-year life,...
You are considering a new product launch. The project will cost $1,950,000, 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 $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 percent, and the relevant tax rate is 34 percent.    a. Based on your experience, you think...
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 $790,000, have a 4-year life,...
You are considering a new product launch. The project will cost $790,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 490 units per year; price per unit will be $18,100, variable cost per unit will be $14,900, and fixed costs will be $765,000 per year. The required return on the project is 17 percent, and the relevant tax rate is 22 percent.    a. The unit sales, variable cost, and...
You are considering a new product launch. The project will cost $2,350,000, have a 4-year life,...
You are considering a new product launch. The project will cost $2,350,000, have a 4-year life, and have no salvage value; depreciation is straight-line to 0. Sales are projected at 150 units per year; price per unit will be $31,000; variable cost per unit will be $19,000; and fixed costs will be $620,000 per year. The required return on the project is 14%, 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 $1,650,000, have a 4-year life,...
You are considering a new product launch. The project will cost $1,650,000, have a 4-year life, and have no salvage value; depreciation is straight-line to 0. Sales are projected at 150 units per year; price per unit will be $21,000; variable cost per unit will be $12,000; and fixed costs will be $480,000 per year. The required return on the project is 12%, and the relevant tax rate is 30%. a. Based on your experience, you think the unit sales,...
You are considering a new product launch. The project will cost $720,000, have a 4-year life,...
You are considering a new product launch. The project will cost $720,000, have a 4-year life, and have zero salvage value; depreciation is straight-line to zero. Sales are projected at 380 units per year; price per unit will be $17,400; variable cost per unit will be $14,100; and fixed costs will be $680,000 per year. The required return on the project is 15% and the tax rate is 21%. Based on your experience, you think the unit sales, variable cost,...
You are considering a new product launch. The project will cost $810,000, have a 4-year life,...
You are considering a new product launch. The project will cost $810,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 480 units per year; price per unit will be $18,300, variable cost per unit will be $15,000, and fixed costs will be $815,000 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 $1,450,000, have a 4-year life,...
You are considering a new product launch. The project will cost $1,450,000, have a 4-year life, and have no salvage value; depreciation is straight-line to 0. Sales are projected at 160 units per year; price per unit will be $17,000; variable cost per unit will be $10,000; and fixed costs will be $440,000 per year. The required return on the project is 12%, and the relevant tax rate is 32%. a. Based on your experience, you think the unit sales,...
You are considering a new product launch. The project will cost $830,000, have a 4-year life,...
You are considering a new product launch. The project will cost $830,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 470 units per year; price per unit will be $18,500, variable cost per unit will be $15,200, and fixed costs will be $845,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 21 percent.    a. The unit sales, variable cost, and...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT