PLEASE ANWSER B!! THANK YOU :)

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 100 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%. Ignore the half-year rule for accounting for depreciation. (18 marks total)

a. Calculate the following six numbers for this project. Round your answers to two decimal places.

(i) NPV

(2 marks)

Sales	$1,900,000
Variable costs	$1,400,000
Gross profit	$500,000
Fixed costs	$150,000
Depreciation	$170,000
EBIT	$180,000
Taxes 35%	$63,000
Net Income	$117,000

OCF = EBIT + depreciation taxes = 180000 + 170000 63000 = 287,000 PVAF= (1 (1 / (1 + r)^N)) / r = (1-(1/(1+.15)^4))/.15 = 2.854978363

PV of cash inflow = 287,000 * 2.854978363 = 819,398.7901 NPV = 819,398.7901 680000 = 139,398.79

(ii) Profitability Index (PI) (1 mark) = PV of cash inflow/initial investment = 1.20

(iii) Payback period (in years) (1 mark)

Initial investment/ cash flow = 680000/287000 = 2.37 years

(iv) Discounted payback period (in years) (1 mark)

3.15 years

(v) Internal Rate of Return (IRR in %) (1 mark)

CF0 = -680,000 CF1 = 287,000 CF2= 287,000 CF3= 287,000 CF4 = 287,000 COMP I/Y IRR = 24.82

(vi) Average Accounting Return (AAR in %) (2 marks)

Hint: Net Income = {[(Price variable cost)*Quantity Sold] Fixed Costs Depreciation} * (1 Tax rate)

Average annual profit/initial investment

117,000/680,000 = 0.17205 = 17.21%

b. Evaluate the sensitivity of the NPV, PI, Payback period, Discounted payback period, AAR, and IRR to a 10% variation in the number of units sold per year. Ensure that you interpret your answers in words.

Hint #1: For example, for the NPV, increase the quantity sold by 10% and re-calculate the NPV. Then calculate the percentage change of this new NPV over the base case NPV from part (a). Repeat the process for a 10% decrease in quantity sold.

Hint #2: You must perform the process in Hint #1 for each of the six items in part (a). Note that IRR and AAR are already rates of returns. You do not have to calculate the percentage changes over the base case numbers for IRR and AAR. Instead, simply calculate the difference between the new numbers and the base case numbers for IRR and AAR.

Hint #3: It may be easier to perform these calculations in a spreadsheet. If you opt to do these calculations in a spreadsheet, ensure that you copy and paste the spreadsheet into your Word document. (10 marks)