You are considering a new product launch. The project will cost $1,800,000, have

Question

You are considering a new product launch. The project will cost $1,800,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 200 units per year; price per unit will be $21,000, variable cost per unit will be $13,500, and fixed costs will be $510,000 per year. The required return on the project is 10 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 upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios?(Negative amounts 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.)

  

  

Evaluate the sensitivity of your base-case NPV to changes in fixed costs. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)

  

  

What is the cash break-even level of output for this project (ignoring taxes)? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

  

  

What is the accounting break-even level of output for this project? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

  

  

What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)

  

You are considering a new product launch. The project will cost $1,800,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 200 units per year; price per unit will be $21,000, variable cost per unit will be $13,500, and fixed costs will be $510,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 35 percent.

Explanation / Answer

Base case

Project cost

Base case

0 1 2 3 4 Investment

Project cost

-1800000 Operations unit sold 200 200 200 200 Price per unit 21000 21000 21000 21000 Total revenue 4200000 4200000 4200000 4200000 variable cost per unit 13500 13500 13500 13500 Total variable cost 2700000 2700000 2700000 2700000 Fixed cost 510000 510000 510000 510000 Depreciation 450000 450000 450000 450000 EBIT 540000 540000 540000 540000 Tax(35%) 189000 189000 189000 189000 Net income 351000 351000 351000 351000 =+Non cash cash expense 450000 450000 450000 450000 Operating cash flow 801000 801000 801000 801000 NPV =-1800000 + (801000)/(1.1)+(801000/(1.1^2))+(801000/(1.1^3))+(801000/(1.10^4)) NPV 739062.2 Normal upper band lower band +10% -10% Unit sales 200 220 180 VC 13500 14850 12150 Fixed cost 510000 561000 459000 Sceneriao Base case Wrose case Best case Price per unit 21000 21000 21000 Total revenue 4200000 4620000 3780000 Total variable cost 2700000 3267000 2187000 Fixed cost 510000 561000 459000 Depreciation 450000 450000 450000 EBIT 540000 342000 684000 Tax(35%) 189000 119700 239400 Net income 351000 222300 444600 =+Non cash cash expense 450000 450000 450000 Operating cash flow 801000 672300 894600 Required return 10% 10% 10% NPV 739062.2 331100.54 1035762

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