You are considering a new product launch. The project will cost $1,700,000, have
ID: 2768395 • Letter: Y
Question
You are considering a new product launch. The project will cost $1,700,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 140 units per year; price per unit will be $22,000, variable cost per unit will be $12,500, and fixed costs will be $490,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 32 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 $1,700,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 140 units per year; price per unit will be $22,000, variable cost per unit will be $12,500, and fixed costs will be $490,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 32 percent.
Explanation / Answer
Answer:a
Answer:b
Answer:c Cash Break even=Fixed cost/(Price-Variable cost)
=$490000/($22000-$12500)
=51.57 units
=1134540 Sales volume
Answer:d-1
Accounting break even=(Fixed cost+Dep)/(Price-variable cost)
=($490000+425000)/($22000-$12500)
=96.32 units
=2119040 Sales volume
Answer:d-2 DOL=1+(FC/OCF)
=1+(490000/425000)
=2.153 times
Base case 0 1 2 3 4 Investment: Project cost -1700000 Operation: Unit sold 140 140 140 140 Price per unit 22000 22000 22000 22000 Total revenue 3080000 3080000 3080000 3080000 Variable cost per unit 12500 12500 12500 12500 Total variable cost 1750000 1750000 1750000 1750000 Fixed cost 490000 490000 490000 490000 Dep 425000 425000 425000 425000 EBIT 415000 415000 415000 415000 Tax (32%) 132800 132800 132800 132800 Net income 282200 282200 282200 282200 Add: Non cash exp 425000 425000 425000 425000 OCF 707200 707200 707200 707200 Req return 10% Project CF -1700000 707200 707200 707200 707200 NPV 541728.84Related Questions
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