You are considering a new product launch. The project will cost $1,400,000, have

Question

You are considering a new product launch. The project will cost $1,400,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 180 units per year; price per unit will be $16,000, variable cost per unit will be $9,800, and fixed costs will be $430,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 35 percent. Evaluate the sensitivity of your base-case NPV to an increase in fixed costs by $10,000? Please show your work.

Explanation / Answer

Sensitivity of NPV = (306686.60 - 326429.37)/326429.37 = -6.05%

Best of Luck. God Bless

A B C D E 1 Year 0 1 2 3 4 2 Project Cost 1400000 3 Revenue = Sales per unit * Price per unit 2880000 2880000 2880000 2880000 4 Variable Cost 1764000 1764000 1764000 1764000 5 Fixed Cost 430000 430000 430000 430000 6 Depreciation = Project cost/5 350000 350000 350000 350000 7 EBIT=Revenue - Variable Cost - Fixed Cost- Depreciation 336000 336000 336000 336000 8 Tax = EBIT*35% 117600 117600 117600 117600 9 EAT=EBIT-Tax 218400 218400 218400 218400 10 Add depreciation 568400 568400 568400 568400 11 Free Cash Flow -1400000 568400 568400 568400 568400 12 Discount rate 12% NPV 326429.37 NPV(A12,B11:E11)+A11 A B C D E 1 Year 0 1 2 3 4 2 Project Cost 1400000 3 Revenue = Sales per unit * Price per unit 2880000 2880000 2880000 2880000 4 Variable Cost 1764000 1764000 1764000 1764000 5 Fixed Cost+10000 440000 440000 440000 440000 6 Depreciation = Project cost/5 350000 350000 350000 350000 7 EBIT=Revenue - Variable Cost - Fixed Cost- Depreciation 326000 326000 326000 326000 8 Tax = EBIT*35% 114100 114100 114100 114100 9 EAT=EBIT-Tax 211900 211900 211900 211900 10 Add depreciation 561900 561900 561900 561900 11 Free Cash Flow -1400000 561900 561900 561900 561900 12 Discount rate 12% NPV 306686.60 NPV(A12,B11:E11)+A11

Sensitivity of NPV = (306686.60 - 326429.37)/326429.37 = -6.05%

Best of Luck. God Bless

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