Question

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, 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           

Answer 1

Answer:

c)

Cash breakeven point = Fixed cost / (sales price – variable cost)

Cash breakeven point = 480000 / (21000 – 12000)

Cash breakeven point = 480000 / 9000 = 53.33 = 54 units

d-1)

Accounting breakeven point = (Fixed cost + depreciation)/ (sales price – variable cost)

Accounting breakeven point = (480000+412500)/(21000-12000)

Accounting breakeven point = 99.17 = 100 units

d-2)

Degree of operating leverage at accounting breakeven point = %change in EBIT / % change in sales

EBIT when 150 units sold = 457500

EBIT when 100 units sold = 7500

% change in EBIT = (457500-7500)/457500 *100 = 98%

% change in sales = (150-100)/150 *100 = 33.33%

Degree of operating leverage = 98 / 33.33 = 2.94