3. You are considering a new product launch. The project will cost $820,000, have a four-year...

3. You are considering a new product launch. The project will cost $820,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 450 units per year; price per unit will be $18,000; variable cost per unit will be $15,400; and fixed costs will be $610,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 35 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?

b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. For every dollar increase in fixed cost, by how much the NPV changes? c. What is the accounting break-even level of output for this project?

Expert Solution

a) Net Present Value

Base case = $ 424530

Best case = $ 2168089

Worst case = $ -1956817

b) Sensitivity of project is -1.86

c) Break even point = 313 units

jeff jeffy answered 1 year ago

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3. You are considering a new product launch. The project will cost $820,000, have a four-year...

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