Question

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, 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