You are considering a new product launch. The project will cost $1,550,000, have

Question

You are considering a new product launch. The project will cost $1,550,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 150 units per year; price per unit will be $19,000, variable cost per unit will be $11,000, and fixed costs will be $460,000 per year. The required return on the project 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 ±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 amount should be indicated by a minus sign. Round your NPV answers to 2 decimal places. (e.g., 32.16))

  

  

Evaluate the sensitivity of your base-case NPV to changes in fixed costs. (Negative amount should be indicated by a minus sign. 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)? (Round your answer to 2 decimal places. (e.g., 32.16))

   

   

What is the accounting break-even level of output for this project? (Round your answer to 2 decimal places. (e.g., 32.16))

   

  

What is the degree of operating leverage at the accounting break-even point? (Round your answer to 3 decimal places. (e.g., 32.161))

   

You are considering a new product launch. The project will cost $1,550,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 150 units per year; price per unit will be $19,000, variable cost per unit will be $11,000, and fixed costs will be $460,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 34 percent.

Explanation / Answer

best case scenario (lower bound):
Unit sales@10% = 150*(1+0.10) = 165 units

price per unit =19000(1+0.10)=$20900

Variable cost per unit @10%= $11000*(1-0.10) = $9900
Fixed cost @ 10% = $460,000*% = $414,000

worst case scenario (upper bound:
Unit sales will by 10% = 150*(1-0.10)= 135units

price per unit=19000(1-0.10)=17100
Variable cost per unit by 10% = $11000*(1+0.10)= $12100
Fixed cost by 10% = $460,000*(1+0.10) = $506,000

Base Case best Case worst Case Units 150 165 135 Sales price per unit 19,000.00 19,000.00 19,000.00 Variable Cost per unit 11,000.00 9,900.00 12,100.00 Contribution per unit (Sales price per unit - Variable cost per unit) 8,000.00 9,100.00 6,900.00 Total Contribution (Contribution per unit * Units sold) 12,00,000.00 13,65,000.00 10,35,000.00 Fixed Cost 4,60,000.00 4,14,000.00 5,06,000.00 Depreciation 4,20,500.00 4,20,500.00 4,20,500.00 Income before tax 12,39,500.00 13,58,500.00 11,20,500.00 Tax on income @ 34% 4,21,430.00 4,61,890.00 3,80,970.00 Net income 4,21,430.00 4,61,890.00 3,80,970.00 Operating Cashflow (Net Income + Depreciation) 8,41,930.00 8,82,390.00 8,01,470.00 Net present value calculation: Year Capital Base Case OCF Worst Case OCF Best Case OCF PV Factor @ 12% Base Case Present Value Worst Case Present Value Best Case Present Value 0 -15,50,000.00 1 -15,50,000.00 -15,50,000.00 -15,50,000.00 1 8,41,930.00 8,01,470.00 8,82,390.00 0.89285714 7,51,723.21 7,15,598.21 7,87,848.21 2 8,41,930.00 8,01,470.00 8,82,390.00 0.79719388 6,71,181.44 6,38,926.98 7,03,435.91 3 8,41,930.00 8,01,470.00 8,82,390.00 0.71178025 5,99,269.14 5,70,470.52 6,28,067.77 4 8,41,930.00 8,01,470.00 8,82,390.00 0.63551808 5,35,061.74 5,09,348.67 5,60,774.80 Net present value 10,07,235.54 8,84,344.38 11,30,126.69 Cash and accounting break-even: Base Case Worst Case Best Case Units 150 165 135 Sales price per unit 19,000.00 19,000.00 19,000.00 Variable Cost per unit 11,000.00 9,900.00 12,100.00 Contribution per unit (Sales price per unit - Variable cost per unit) 8,000.00 9,100.00 6,900.00 Fixed Cost 4,60,000.00 4,14,000.00 5,06,000.00 Depreciation 4,20,500.00 4,20,500.00 4,20,500.00 Cash break even (Fixed Cost divided by Contribution per unit) 57.5 45.49450549 73.33333333 Accounting break even (Fixed Cost + Depreciation divided by Contribution per unit) 460052.5625 414046.2088 506060.942

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