You are considering a new project launch. The project will cost $1950000, have a four-year life...

You are considering a new project launch. The project will cost $1950000, have a four-year life and have no salvage value; depreciation is straight-line to zero. Sales are projected at 210 units per year; price per unit will be 17500, variable cost per unit will be 10,600, and fixed costs will be 560,000 per year. The required return on the project is 12 percent and the relevant tax rate is 21 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.

c. What is the cash break-even level of output for this project (ignoring taxes)?

d. What is the accounting break-even level of output for this project? What is the degree of operating leverage at the accounting break-even point? How do you interpret this number?

Expert Solution

jeff jeffy answered 1 year ago

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You are considering a new project launch. The project will cost $1950000, have a four-year life...

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