In: Finance
You are considering a new product launch. The project will cost $1,700,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 140 units per year; price per unit will be $22,000, variable cost per unit will be $12,500, and fixed costs will be $490,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 32 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 answer 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.) |
Scenario | Upper bound | Lower bound | |
Unit sales | units | ||
Variable cost per unit | $ | $ | |
Fixed costs | $ | $ | |
Scenario | NPV |
Base-case | $ |
Best-case | $ |
Worst-case | $ |
b. |
Calculate the sensitivity of your base-case NPV to changes in fixed costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) |
ΔNPV/ΔFC | $ |
c. |
What is the accounting break-even level of output for this project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) |
Accounting break-even | units |