4. 19.

Project analysis [LO 11.1, 11.2, 11.3, 11.4] You are considering a new product launch. The project will cost $1 950 000, have a four-year life and have no salvage value; depreciation is straight-line to zero. Sales are projected at 210 units per year; price per unit will be $17 500, variable cost per unit will be $10 600 and fixed costs will be $560 000 per year. The required return on the project is 12 per cent and the relevant tax rate is 30 per cent.

1. Based on your experience, you think the unit sales, variable cost and fixed cost projections given here are probably accurate to within ±10 per cent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the bestcase and worst-case scenarios?

2. Evaluate the sensitivity of your base-case NPV to changes in fixed costs.

3. What is the cash break-even level of output for this project

(ignoring taxes)?

4. What is the accounting break-even level of output for this project? What is the degree of operating leverage at the accounting break-even point? How do you interpret this number?