Question
You are considering a new product launch. The project will cost 5 million baths, have a five year life, and have no salvage value; depreciation
You are considering a new product launch. The project will cost 5 million baths, have a five year life, and have no salvage value; depreciation is straight line to zero. Sales are projected at 200 units per year; price per year will be 50,000 baths, variable cost per unit will be 20,000 baths, fixed costs will be 500,000 baths per year and interest expense is 200,000 baths per year. The required return on the project is 16%, and the relevant tax rate is 35 %. a) Based on your experience, you think that the quantity and variable costs projections given here are accurate to within +/- 15%. What is the base case NPV? What are the best and worst case NPVs? make a scenario analysis and comment on the degree of forecasting risk. b) Given the base case projections in the previous problem, what are the cash, accounting and financial break even sales level for this project? Discuss your results. (Ignore taxes in answering.)
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