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Scenario and Sensitivity Analyses:

You are considering a new product launch. The project will cost $720,000, has a 4-year life, and have no salvage value; depreciation is straight-line to zero. You have spent $15,000 on a marketing study that determined your projected sales of 400 units per year at $18,100 per unit. Variable costs per unit is estimated to be $12,200 while the annual fixed costs are estimated to be $650,000. You have also spent $50,000 on the research and development of the product. The project will also require a one-off increase in net working capital of $30,000 at the beginning of the project that will be released at the end of the project. The tax rate is 23 percent and the cost of capital is 15%.

Based on your experience, you think the unit sales, unit selling price, the variable costs, and fixed cost projections given here are probably accurate to within 10 percent.

Required (a) What are the upper and lower bounds of these projections, i.e., what are the upper and lower bounds of (i) expected number of units sold, (ii) unit selling price, (iii) unit variable costs, and (iv) annual fixed costs?

(b) What is the base-case NPV? What are the best-case and worst-case scenarios, i.e., what are the best-case and worst-case NPVs?

(c) Evaluate the sensitivity of your base-case NPV to changes in fixed costs. In other words, what is the change in base-case NPV to a $1 change in annual fixed costs?

(d) What is the accounting break-even level of output for this project (based on the base-case scenario)

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