1. You are considering a new product launch. The project will cost $680,000, have a four-year...

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1. You are considering a new productlaunch. The project will cost $680,000, have a four-year life, andhave no salvage value; depreciation is straight-line to zero. Salesare projected at 160 units per year, price per unit will be$19,000, variable cost per unit will be $14,000, and fixed costswill be $150,000 per year. The required return on the project is15%, and the relevant tax rate is 35%.    (17 marks total)
a. Based on your experience, the unitsales, variable cost, and fixed cost projections given here areprobably accurate to within ± 10%. What are the upper and lowerbounds for these projections for unit sales, variable cost, andfixed cost?
b. What is the base-case NPV?                                                       (1 mark)
c. What are the NPVs in the best-caseand worst-case scenarios?
d. Evaluate the sensitivity of yourbase-case NPV to changes in fixed costs.                                                                                               (2.5 marks)
e. What is this project’s cashbreak-even level of output (ignoring taxes)? (1mark)
f.   What is the accountingbreak-even level of output for this project, and what is the degreeof operating leverage (DOL) at the accounting break-even point? Howdo you interpret this DOLnumber?                                         (2.5marks)
g. What is the financial break-evenlevel of output for this project, and what is the degree ofoperating leverage (DOL) at the financial break-even point? How doyou interpret this DOLnumber?

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4.1 Ratings (890 Votes)

Part aScenariosBase CaseWorst CaseBest CaseUnit sales160144176VC per unit140001540012600VC224000022176002217600Fixed Cost150000165000135000Base case figures are given VC VC per unit x Unit SalesWorst CaseUnit sales Base case sales x 09 160 x 09 144VC per unit Base case VC per unit x 110 14000 x 110 15400Fixed Cost Base case Fixed Cost x 110 150000 x 110 165000Best CaseUnit sales Base case sales x 110 160 x 110 176VC per unit Base case VC per unit x 090 14000 x 090 12600Fixed Cost Base case Fixed Cost x 110 150000 x 090 135000Part B Base case NPV is calculated belowBase caseYearRemark01234Unit salesGiven160160160160SPGiven19000190001900019000VC per unitGiven14000140001400014000SalesSP x Unit Sales3040000304000030400003040000VCVC per unit x Unit Sales2240000224000022400002240000Fixed CostGiven150000150000150000150000EBITDASales CV Fixed Cost650000650000650000650000DepreciationCalculated170000170000170000170000EBTEBITDADepreciation480000480000480000480000Taxes035 x See Answer

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1. You are considering a new productlaunch. The project will cost $680,000, have a four-year life, andhave no salvage value; depreciation is straight-line to zero. Salesare projected at 160 units per year, price per unit will be$19,000, variable cost per unit will be $14,000, and fixed costswill be $150,000 per year. The required return on the project is15%, and the relevant tax rate is 35%. (17 marks total)a. Based on your experience, the unitsales, variable cost, and fixed cost projections given here areprobably accurate to within ± 10%. What are the upper and lowerbounds for these projections for unit sales, variable cost, andfixed cost? b. What is the base-case NPV? (1 mark)c. What are the NPVs in the best-caseand worst-case scenarios? d. Evaluate the sensitivity of yourbase-case NPV to changes in fixed costs. (2.5 marks)e. What is this project’s cashbreak-even level of output (ignoring taxes)? (1mark)f. What is the accountingbreak-even level of output for this project, and what is the degreeof operating leverage (DOL) at the accounting break-even point? Howdo you interpret this DOLnumber? (2.5marks)g. What is the financial break-evenlevel of output for this project, and what is the degree ofoperating leverage (DOL) at the financial break-even point? How doyou interpret this DOLnumber?