You are considering a new product launch. The project will cost $2,350,000, have a 4-year life, and have no salvage value; depreciation is straight-line to 0. Sales are projected at 150 units per year; price per unit will be $31,000; variable cost per unit will be $19,000; and fixed costs will be $620,000 per year. The required return on the project is 14%, and the relevant tax rate is 34%.

a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within 10%. 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?

b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs.

NPV/FC=

c. What is the cash break-even level of output for this project (ignoring taxes)?

d. What is the accounting break-even level of output for this project?

e. What is the degree of operating leverage at the accounting break-even point?