Question
I've just got an assignments to do, but I need some help how to work it out. Please help me for those following 2 questions,
I've just got an assignments to do, but I need some help how to work it out. Please help me for those following 2 questions, I would be highly appreciated.
Q1:You are considering a new product. It will cost $966 000 to launch and have a 3-year life and no salvage value. Depreciation is straight-line to zero salvage. The required return is 20 per cent, and the tax rate is 30 per cent. Sales are projected at 80 units per year. Price per unit will be $40 000, variable cost per unit is $24 000 and fixed costs are $500 000 per year. c. Based on your experience, you think that the unit sales, price per unit, variable cost and fixed cost projections above are probably accurate to within 15 per cent. What are the upper and lower bounds for these projections? What is the base case NPV? What are the best- and worst-case scenarios?
b. Evaluate the sensitivity of your base case NPV to changes in fixed costs.
Q2:Poggio Manufacturers Ltd is evaluating a project that costs $280 000, has a 7-year life, and no salvage value. Assume that depreciation is prime-cost to zero salvage over the 7 years. Poggio requires a return of 10 per cent on such projects. The tax rate is 30 per cent. Sales are projected at 60 000 units per year. Price per unit is $23.80,variable cost per unit is $10.52 and fixed costs are $100 000 per year. a. Calculate the base case cash flow and NPV. Suppose that you think that the sales projection is accurate only to within 25 per cent. Evaluate the sensitivity of NPV to changes in that projection. b. Suppose the projections given are all accurate to within 5 per cent except for sales volume, which is only accurate to within 15 per cent. Calculate the NPV under the best and worst scenarios.
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