In: Finance
You are considering a new product launch. The project will cost $2,400,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 350 units per year; price per unit will be $19,900, variable cost per unit will be $14,300, and fixed costs will be $740,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 23 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? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your NPV answers to 2 decimal places, e.g., 32.16. Round your other answers to the nearest whole number, e.g. 32.) |
b. |
Evaluate 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 2 decimal places, e.g., 32.16.) |
c. | What is the cash break-even level of output for this project (ignoring taxes)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
d-1. | 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.) |
d-2. | What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) |