Project Analysis You are considering a new product launch. The project will cost 1,700,000, have a four-year
Question:
Project Analysis You are considering a new product launch. The project will cost £1,700,000, have a four-year life, and have no salvage value; depreciation is 20 per cent reducing balance. Sales are projected at 190 units per year; price per unit will be £18,000, variable cost per unit will be £11,200, and fixed costs will be £410,000 per year.
The required return on the project is 12 per cent, and the relevant tax rate is 28 per cent.
(a) 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 best-case and worstcase scenarios?
(b) Evaluate the sensitivity of your base-case NPV to changes in fixed costs.
(c) What is the cash break-even level of output for this project (ignoring taxes)?
(d) 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?
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9780077178239
3rd Edition
Authors: David Hillier, Iain Clacher, Stephen A. Ross