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. a. The unit sales, variable cost, and fixed cost projections given above 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?

Explanation / Answer

The above is the base case NPV

0 1 2 3 4 Investment -$1,550,000 Sales $ 2,850,000 $ 2,850,000 $ 2,850,000 $ 2,850,000 VC -$1,650,000 -$1,650,000 -$1,650,000 -$1,650,000 FC -$   460,000 -$   460,000 -$   460,000 -$   460,000 Depreciation -$   387,500 -$   387,500 -$   387,500 -$   387,500 EBT $    352,500 $    352,500 $    352,500 $    352,500 Tax (34%) -$   119,850 -$   119,850 -$   119,850 -$   119,850 Profits $    232,650 $    232,650 $    232,650 $    232,650 Cash Flows -$1,550,000 $    620,150 $    620,150 $    620,150 $    620,150 NPV $333,612.20

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