You are considering a new product launch. The project will cost $2,000,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 240 units per year; price per unit will be $17,900, variable cost per unit will be $11,900, and fixed costs will be $580,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 22 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.

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

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?

NPV Scenario Base Unit Sales Variable Cost Fixed Costs 240 $ 11,900 $ 580,000 Best Worst C. b. ANPVIAFC Cash break-even d-1. Accounting break-even d-2. Degree of operating leverage