You are considering a new product launch. The project will cost $1,675,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 195 units per year; price per unit will be $16,300, variable cost per unit will be $9,400, and fixed costs will be $550,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 21 percent.

1. Based on your experience, you think the unit sales, variable cost and fixed cost projections given here will be within a range of 10% plus or minus.

• What are the upper and lower bounds for your projections?
• What is the NPV for the base case?
• What are the best and worst case scenarios?

2. Evaluate the sensitivity of base case NPV to changes in fixed costs
3. What is the cash break even level of output for this project (ignoring taxes)?
4. What is the accounting break even level of output for this project? What is the degree of operating leverage at this level of output?