Question

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 fixed cost projections given above 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? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your NPV answers to 2 decimal places, e.g., 32.16.)

b.	Calculate the sensitivity of your base-case NPV to changes in fixed costs. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

c.	What is the accounting break-even level of output for this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

    

Answer 1

a) Answer : in excel with formulaes

b) When only change in fixed cost happen:

Same formulaes will apply

c) Break even level of output is that level where the outflows = inflows

we can see it like this

let say y units of output will be produced

now total sales = y*18100

Variable cost = y*14900
Total contribution = 18100y-14900y = 3200y

Operating cash flows = (3200y - 197500 - 765000) * (1-0.22) + 197500

= 2304y - 750750 + 197500

= 2304y-553250

Now

790000 = (2304y - 553250) * 2.743

y = 365.112 aprrox

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