Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You are considering a new product launch. The project will cost $2,375,000, 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 $2,375,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 340 units per year; price per unit will be $19,900, variable cost per unit will be $14,150, and fixed costs will be $730,000 per year. The required return on the project is 11 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? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your NPV answers to 2 decimal places, e.g., 32.16. Round your other answers to the nearest whole number, e.g. 32.)

b.

Evaluate 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 2 decimal places, e.g., 32.16.)

c. What is the cash break-even level of output for this project (ignoring taxes)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
d-1. 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.)
d-2. What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance

Authors: Jack Kapoor, Les Dlabay, Robert J. Hughes

7th Edition

0072866578, 9780072866575

More Books

Students also viewed these Finance questions