You are considering a new product launch. The project will cost $1,202,500, have

Question

You are considering a new product launch. The project will cost $1,202,500, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 250 units per year; price per unit will be $18,700, variable cost per unit will be $15,200, and fixed costs will be $323,000 per year. The required return on the project is 15 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

Requirement 1:

Explanation / Answer

Requirement 1:

a)

Best case NPV

So the best case NPV = $120528.57

Worst Case NPV

Worst case NPV is $-120022.08

b)

Base Case NPV

Best case NPV = $253.25

Requirement 2

Sesitivity analysis

For every dollar FC increase NPV falls by $2.18

Year 0 1 2 3 4 5 Initial inv -1202500 Sales(units) 275 275 275 275 275 Sales($) 5142500 5142500 5142500 5142500 5142500 Variable cost 4180000 4180000 4180000 4180000 4180000 Fixed Cost 355300 355300 355300 355300 355300 Gross profit 607200 607200 607200 607200 607200 Tax 212520 212520 212520 212520 212520 Net profit 394680 394680 394680 394680 394680 NPV@15% $1,20,528.57

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