Question
You are considering a new product launch. The project will cost $2,250,000, have a 4-year life, and have no salvage value; depreciation is straight-line to
You are considering a new product launch. The project will cost $2,250,000, have a 4-year life, and have no salvage value; depreciation is straight-line to 0. Sales are projected at 140 units per year; price per unit will be $30,000; variable cost per unit will be $18,000; and fixed costs will be $600,000 per year. The required return on the project is 10%, and the relevant tax rate is 35%. 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? (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round the final NPV answers to 2 decimal places. Omit $ sign in your response.) Scenario Unit Sales Variable Cost Fixed Costs NPV Base $ $ $ Best $ $ $ Worst $ $ $ b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to 3 decimal places. Omit $ sign in your response.) NPV/FC $ c. What is the cash break-even level of output for this project (ignoring taxes)? (Round the final answers to the nearest whole unit.) Cash breakeven units d-1. What is the accounting break-even level of output for this project? (Round the final answers to the nearest whole unit.) Accounting breakeven units d-2. What is the degree of operating leverage at the accounting break-even point? (Round the final answer to 4 decimal places.) Degree of operating leverage
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