Problem 11-19 Project Analysis [LO1, 2, 3, 4]

You are considering a new product launch. The project will cost$2,225,000, have a four-year life, and have no salvage value;depreciation is straight-line to zero. Sales are projected at 280units per year; price per unit will be $19,700, variable cost perunit will be $13,250, and fixed costs will be $670,000 per year.The required return on the project is 12 percent, and the relevanttax rate is 21 percent.

  

a.

Based on your experience, you think the unit sales, variablecost, and fixed cost projections given here are probably accurateto within ±10 percent. What are the upper and lower bounds forthese projections? What is the base-case NPV? What are thebest-case and worst-case scenarios? (A negative answershould be indicated by a minus sign. Do not round intermediatecalculations. 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 infixed costs. (A negative answer should be indicated by aminus sign. Do not round intermediate calculations and round youranswer 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 calculationsand round your answer to 2 decimal places, e.g.,32.16.)
d-1.	What is the accounting break-even level of output for thisproject? (Do not round intermediate calculations and roundyour answer to 2 decimal places, e.g., 32.16.)
d-2.	What is the degree of operating leverage at the accountingbreak-even point? (Do not round intermediate calculationsand round your answer to 3 decimal places, e.g.,32.161.)