Task $1$: Project Evaluation

You are considering a new product launch. The project will cost $$1,000,000,$ have a five$-$year

life, and have no salvage value; depreciation is straight$-$line to zero. Sales are projected at $5,000$

units per year; the price per unit will be $$7,000,$ the variable cost per unit will be $$6,400,$ and fixed

costs will be $$270,000$ per year. The required return on the project is $11$ percent, and the relevant

tax rate is $21$ percent. Based on your experience, you think the unit sales, variable cost, and fixed

cost projections are accurate within $+-8$ percent.

Questions:

What are the upper and lower bounds for these projections? What are NPVs for the base$-$

case, the best$-$case, and worst$-$case scenarios? $(15$ Points$)$

What is the accounting break$-$even level of output for this project? Solve for both with taxes

and ignoring taxes. $(8$ Points$)$

What is the cash break$-$even level of output for this project? Solve for both with taxes and

ignoring taxes. $(8$ Points$)$

What is the financial break$-$even level of output for this project? Solve for both with taxes

and ignoring taxes. $(8$ Points$)$

What is the degree of operating leverage under each scenario? $(6$ Points$)$

Draw the chart showing the sensitivity of the base$-$case NPV to changes in unit price. $(10$

Points$)$ Question. $1$

Unit sales

Variable cost$/$unit

Fixed costs

Sales

Variable cost

Fixed cost

Depreciation

EBIT

Taxes $(21\%)$

Net income

OCF

NPV

Question $2$

Accounting break$-$even

Question $3$

Cash break$-$even

Question$-4$

OCF at financial$-$break even

Financial break$-$even

Question $5$

Degree of operating leverage

$($ignoring Taxes$)$

$($with Taxes$)$

$($ignoring Taxes$)($with Taxes$)$

$($ignoring Taxes$)$

$($with Taxes$)$

Question $6$

Draw graph of "Sensitivity of NPV to changes in unit price" PLEASE PROVIDE ALL ANSWERS AND EXCEL FORMULAS $!!!!$