Question
You are considering a new product launch. The project will cost $2,300,000, have a four-year life, and have no salvage value; depreciation is straight-line to
You are considering a new product launch. The project will cost $2,300,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per year; price per unit will be $30,000, variable cost per unit will be $18,500, and fixed costs will be $610,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 36 percent. a. The unit sales, variable cost, and fixed cost projections given above 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? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your NPV answers to 2 decimal places, e.g., 32.16.) Scenario Upper bound Lower bound Unit sales units Variable cost per unit $ $ Fixed costs $ $ Scenario NPV Base-case $ Best-case $ Worst-case $ b. Calculate the sensitivity of your base-case NPV to changes in fixed costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) NPV/FC $ c. What is the accounting break-even level of output for this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Accounting break-even level units
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started