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Scenario Variable cost Fixed costs 7-13 NH Unit sales 380 Base $14,100 $680,000 3 Best 10% more than Base 10% less than Base 10% less than Base 4 Worst 10% more than Base 10% less than Base 10% more than Base 5 Scenario Unit sales Variable cost Fixed costs 6 7 Base 380 Best 418 $14,100 $12,690 $15,510 $680,000 $612,000 $748,000 Worst 342 9 10 Price $ $ 17,400 Investment 720,000 11 620000 12 13 14 15 Best Worst When FC=620000 16 17 18 - FC A-T OCF = NI + Depreciation Base Rev $6,612,000 - VC $5,358,000 $680,000 - Dep $180,000 =EBT $394,000 - $137,900 = NI $256,100 + Dep $180,000 = A-TCF $436,100 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Or, A-T OCF = B-T Cash Flows x (1 - T) + DepxT BTCFx(1-1) $373,100 +Dxt $63,000 = A-TOCF $436,100 NPV $525,056 33 b) The sensitivity of NPV to changes in fixed costs = (NPVbase - NPVFC-840000)/(610000-620000)= c) Acc BE = (FC + D)/(P-V) = units 34 35 38 39 40 41 42 43 36 13. Project Analysis You are considering a new product launch. The project will cost $720.000. have 37 a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 380 units per year, price per unit will be $17.400; variable cost per unit will be $14.100: and fixed costs will be $680,000 per year. The required return on the project is 15 percent and the relevant tax rate is 21 percent. a. Based on your experience. you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within +10 percent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios? 44 b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. c. What is the accounting break-even level of output for this project? 46 In Part b) of problem 13, choose another level of fixed costs of $690,000 to do the sensitivity analysis. See the HW hints posted for more information. 45