A3Q8 You are considering a new product launch. The project will cost $680,000, h
ID: 2807477 • Letter: A
Question
A3Q8
You are considering a new product launch. The project will cost $680,000, have a four-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 $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%.
a. Based on your experience, the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ± 10%. What are the upper and lower bounds for these projections for unit sales, variable cost, and fixed cost?
b. What is the base-case NPV?
c. What are the NPVs in the best-case and worst-case scenarios?
d. Evaluate the sensitivity of your base-case NPV to changes in fixed costs.
e. What is this project’s cash break-even level of output (ignoring taxes)?
f. What is the accounting break-even level of output for this project, and what is the degree of operating leverage (DOL) at the accounting break-even point? How do you interpret this DOL number?
g. What is the financial break-even level of output for this project, and what is the degree of operating leverage (DOL) at the financial break-even point? How do you interpret this DOL number?
Explanation / Answer
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Normal Optimistic Pessimistic Units Rate Amount Units Rate Amount Units Rate Amount Sales 160 19,000 30,40,000 176 19,000 33,44,000 144 19,000 27,36,000 Varaiable Cost 160 14,000 22,40,000 176 12,600 22,17,600 144 15,400 22,17,600 Contribution 8,00,000 11,26,400 5,18,400 Fixed Cost 1,50,000 1,35,000 1,65,000 Depreciation 1,70,000 1,70,000 1,70,000 Profit 4,80,000 8,21,400 1,83,400 Tax 1,68,000 2,87,490 64,190 Net Profit 3,12,000 5,33,910 1,19,210 Depn 1,70,000 1,70,000 1,70,000 ATCF 4,82,000 7,03,910 2,89,210 Year 0 1 2 3 4 NPV Initial Outflow -6,80,000 ATCF 4,82,000 4,82,000 4,82,000 4,82,000 FCF -6,80,000 4,82,000 4,82,000 4,82,000 4,82,000 Dis. Rate 1 0.86956522 0.75614367 0.657516232 0.57175325 Dis. FCF -6,80,000 4,19,130 3,64,461 3,16,923 2,75,585 6,96,100 Year 0 1 2 3 4 NPV Initial Outflow -6,80,000 ATCF 7,03,910 7,03,910 7,03,910 7,03,910 FCF -6,80,000 7,03,910 7,03,910 7,03,910 7,03,910 Dis. Rate 1 0.86956522 0.75614367 0.657516232 0.57175325 Dis. FCF -6,80,000 6,12,096 5,32,257 4,62,832 4,02,463 13,29,648 Year 0 1 2 3 4 NPV Initial Outflow -6,80,000 ATCF 2,89,210 2,89,210 2,89,210 2,89,210 FCF -6,80,000 2,89,210 2,89,210 2,89,210 2,89,210 Dis. Rate 1 0.86956522 0.75614367 0.657516232 0.57175325 Dis. FCF -6,80,000 2,51,487 2,18,684 1,90,160 1,65,357 1,45,688 Base+10% inc fixed cost Base-10% Dec fixed cost Units Rate Amount Units Rate Amount Sales 160 19,000 30,40,000 160 19,000 30,40,000 Varaiable Cost 160 14,000 22,40,000 160 14,000 22,40,000 Contribution 8,00,000 8,00,000 Fixed Cost 1,65,000 1,35,000 Depreciation 1,70,000 1,70,000 Profit 4,65,000 4,95,000 Tax 1,62,750 1,73,250 Net Profit 3,02,250 3,21,750 Depn 1,70,000 1,70,000 ATCF 4,72,250 4,91,750 Year 0 1 2 3 4 NPV Initial Outflow -6,80,000 ATCF 4,72,250 4,72,250 4,72,250 4,72,250 FCF -6,80,000 4,72,250 4,72,250 4,72,250 4,72,250 Dis. Rate 1 0.86956522 0.75614367 0.657516232 0.57175325 Dis. FCF -6,80,000 4,10,652 3,57,089 3,10,512 2,70,010 6,68,264 Year 0 1 2 3 4 NPV Initial Outflow -6,80,000 ATCF 4,91,750 4,91,750 4,91,750 4,91,750 FCF -6,80,000 4,91,750 4,91,750 4,91,750 4,91,750 Dis. Rate 1 0.86956522 0.75614367 0.657516232 0.57175325 Dis. FCF -6,80,000 4,27,609 3,71,834 3,23,334 2,81,160 7,23,936Related Questions
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