You are considering a new product launch. The project will cost $4,500,000, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 750 units per year; price per unit will be $16,500, variable cost per unit will be $12,000, and fixed costs will be $850,000 per year. The required return on the project is 11 percent, and the relevant tax rate is 25 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within 10 percent.

Check the sensitivity of NPV to the fixed cost and variable costs. Which element of production is more sensitive? (Hint: use different fixed costs and variable costs with your discretion).

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