Question

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 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? The chart wants the following information for base case, best case and worst case. Scenario Unit Sales Variable Cost Fixed Costs NPV   Base $ b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. c. What is the cash break-even level of output for this project (ignoring taxes) d-1 What is the accounting break-even level of output for this projec d-2 What is the degree of operating leverage at the accounting break-even point? Please show me the correct answer and the work because the previous answers are wrong

Answer 1

Base Case			Best Case : Sales up by 10%, VC & FC down by 10%			Worst Case : Sales down by 10%, VC & FC up by 10%
Depriciation = Purchae price / No of Year			Depriciation = Purchae price / No of Year			Depriciation = Purchae price / No of Year
Depriciation (D)	375000		Depriciation (D)	375000		Depriciation (D)	375000
Sales Unit(Q)	160		Sales Unit(Q)	176		Sales Unit(Q)	144
Price / Unit (P)	18000		Price / Unit (P)	18000		Price / Unit (P)	18000
Revenue (PXQ)	2880000		Revenue (PXQ)	3168000		Revenue (PXQ)	2592000
Variable Cost(VC)/ Unit	10500		Variable Cost(VC)/ Unit	9450		Variable Cost(VC)/ Unit	11550
Total Valiable Cost VC X Q	1680000		Total Valiable Cost VC X Q	1663200		Total Valiable Cost VC X Q	1663200
Contribution Margin CM = (S-VC)xQ	1200000		Contribution Margin CM = (S-VC)xQ	1504800		Contribution Margin CM = (S-VC)xQ	928800
Fixed Cost (FC)	450000		Fixed Cost (FC)	405000		Fixed Cost (FC)	495000
EBITDA= CM-FC	750000		EBITDA= CM-FC	1099800		EBITDA= CM-FC	433800
Depriciation (D)	375000		Depriciation (D)	375000		Depriciation (D)	375000
EBIT= EBITDA - D	375000		EBIT= EBITDA - D	724800		EBIT= EBITDA - D	58800
TAX (T) @ 30%	112500		TAX (T) @ 30%	217440		TAX (T) @ 30%	17640
EAT	262500		EAT	507360		EAT	41160
Opearional Cashflow			Opearional Cashflow			Opearional Cashflow
EBIT	375000		EBIT	724800		EBIT	58800
-Tax	112500		-Tax	217440		-Tax	17640
+Depriciation	375000		+Depriciation	375000		+Depriciation	375000
Opearional Cashflow [EBIT -T +D]	637500		Opearional Cashflow [EBIT -T +D]	882360		Opearional Cashflow [EBIT -T +D]	416160
Rate of Return	10%		Rate of Return	10%		Rate of Return	10%
NPV	$                5,20,789.22		NPV	$ 12,96,962.48		NPV	$ -1,80,828.80
Scenario	Unit Sales	Variable Cost	Fixed cost	NPV
Base	160	10500	450000	$    5,20,789.22
Best Case	176	9450	405000	$ 12,96,962.48
Worst	144	11550	495000	$ -1,80,828.80

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SInce, in sensitivity analysis two input value is measured, if two input values are not given we can fins it % change in NPV / 1% change in FC.

If we change or increase 1 % in Fixed cost, NPV will be change by 2% and if FC is decreased by 1 %, then NPV will be up by 3.91 %.

Base Case
Depriciation = Purchae price / No of Year	FC=450000	FC up by 1%	FC down by 1 %
Depriciation (D)	375000	375000	375000
Sales Unit(Q)	160	160	160
Price / Unit (P)	18000	18000	18000
Revenue (PXQ)	2880000	2880000	2880000
Variable Cost(VC)/ Unit	10500	10500	10500
Total Valiable Cost VC X Q	1680000	1680000	1680000
Contribution Margin CM = (S-VC)xQ	1200000	1200000	1200000
Fixed Cost (FC)	450000	454500	445500
EBITDA= CM-FC	750000	745500	754500
Depriciation (D)	375000	375000	375000
EBIT= EBITDA - D	375000	370500	379500
TAX (T) @ 30%	112500	111150	113850
EAT	262500	259350	265650
Opearional Cashflow
EBIT	375000	370500	379500
-Tax	112500	111150	113850
+Depriciation	375000	375000	375000
Opearional Cashflow [EBIT -T +D]	637500	634350	640650
Rate of Return	10%	10%	10%
NPV	$                5,20,789.22	$       5,10,804.15	$       5,30,774.30
Change in NPV		-1.92%	3.91%

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Cash break even = Fixed Cost / (Sales Price - Variable Cost) = 450000/(18000-10500) = 60

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Account Break Even = (Fixed Cost + Depriciation) / (Sales Price - Variable Cost)

=( 450000 + 375000)/(18000-10500) = 110

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Degree opf Operating Leverages = 1 + FC/OCF = 1 + 450000/637500 = 1.7