You are considering a new product launch. The project will cost $630,000, have a

Question

You are considering a new product launch. The project will cost $630,000, have a 5-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per year, price per unit will be $24,000, variable cost per unit will be $12,000, and fixed costs will be $283,000 per year. The required return is 12 percent and the relevant tax rate is 34 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within

Explanation / Answer

$2,654,241

Unit sales; Worst = 160 (1 - 0.09) = 145.6 units
Variable cost per unit; Worst = $12,000 (1 + 0.09) = $13,080
Fixed costs; Worst = $283,000 (1 + 0.09) = $308,470
OCF; Worst = [($24,000 - $13,080)(145.6) - $308,470][1 - 0.34] + 0.34($630,000/5) = $888,618.12

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