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 projects 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?