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You are considering a new product launch. The project will cost $820,000, 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 $820,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 450 units per year; price per unit will be $18,000; variable cost per unit will be $15,400; and fixed costs will be $610,000 per year. The required return on the project is 15% and the 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 with plus/minus 10%. Based on this, what is the base-case NPV? What is the worst-case NPV? (.5) |
b) Evaluate the sensitivity of your base-case NPV to changes in fixed costs. [change in NPV per dollar increase in fixed costs] (.25) |
c) What is the accounting break-even level of annual unit sales for this project? (.25) |
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