1. You are thinking about a new product launch. The project will cost $1,750,000, have a four=year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 190 units per year; price per unit will be $17,300, variable cost per unit will be $10,400, and fixed costs will be $515,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 35 percent. Based on your experience, you think the unit sales, variable cost and fixed costs projections given here are probably accurate to within ±10 percent.
a) Based on your experience, you think the units sales, variable cost, and fix cost projections given here are probably accurate to within 10 percent. What are the upper and lower bounds for theses projections? What is the base-case NPV? What are the best and worst case scenarios?
b) Evaluate the sensitivity of you base-case NPV to changes in fixed costs
c) What is the cash break even level 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?
1. You are thinking about a new product launch. The project will cost $1,750,000, have a four=year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 190 units per year; price per unit will be $17,300, variable cost per unit will be $10,400, and fixed costs will be $515,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 35 percent. Based on your experience, you think the unit sales, variable cost and fixed costs projections given here are probably accurate to within ±10 percent.
a) Based on your experience, you think the units sales, variable cost, and fix cost projections given here are probably accurate to within 10 percent. What are the upper and lower bounds for theses projections? What is the base-case NPV? What are the best and worst case scenarios?
b) Evaluate the sensitivity of you base-case NPV to changes in fixed costs
c) What is the cash break even level 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?
Related questions
| You are considering a new product launch. The project will cost $1,232,500, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 310 units per year; price per unit will be $19,300, variable cost per unit will be $15,800, and fixed costs will be $329,000 per year. The required return on the project is 13 percent, and the relevant tax rate is 35 percent. |
| Requirement 1: |
| Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within |
You are considering a new product launch. The project will cost $1,232,500, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 310 units per year; price per unit will be $19,300, variable cost per unit will be $15,800, and fixed costs will be $329,000 per year. The required return on the project is 13 percent, and the relevant tax rate is 35 percent.
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 best-case and worst-case values for each of the projections? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)
| Scenario | Unit Sales | Variable Costs | Fixed Costs |
| Base | 310 | $15,800 | $329,000 |
| Best | |||
| Worst | |||
What are the best-case and worst-case OCFs and NPVs with these projections? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
| OCF | NPV | |
| Best-case | $ | $ |
| Worst-case | $ | $ |
What are the base-case OCF and NPV? (Do not round intermediate calculations. Round your OCF answer to the nearest whole number, e.g., 32, and round your NPV answer to 2 decimal places, e.g., 32.16.)
| OCFbase | $ |
| NPVbase | $ |
What are the OCF and NPV with fixed costs of $339,000 per year? (Do not round intermediate calculations. Round your OCF answer to the nearest whole number, e.g., 32, and round your NPV answer to 2 decimal places, e.g., 32.16.)
| OCF | $ |
| NPV | $ |
What is the sensitivity of your base-case NPV to changes in fixed costs? (Enter your answer as a positive value. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
For every dollar FC increases, NPV falls by $_____ .
