You are considering a new product launch. The project will cost $2,300,000, have a four-year life,...

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You are considering a new product launch. The project will cost$2,300,000, have a four-year life, and have no salvage value;depreciation is straight-line to zero. Sales are projected at 310units per year; price per unit will be $19,200, variable cost perunit will be $13,700, and fixed costs will be $700,000 per year.The required return on the project is 9 percent, and the relevanttax rate is 24 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?
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.)

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4.1 Ratings (840 Votes)

a Best case and worst case projections Best Base Worst change 10 0 10 Unit sales 341 310 279 Variable cost 12330 13700 15070 Fixed cost 630000 700000 770000 Lower and upper bounds Lower bound Upper bound Unit sales 279 341 Variable cost 12330 15070 Fixed cost 630000 770000 Base case NPV Formula Year n 0 1 2 3 4 Initial cost IC 2300000 Units soldyear u 310 310 310 310 See Answer

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Transcribed Image Text

You are considering a new product launch. The project will cost$2,300,000, have a four-year life, and have no salvage value;depreciation is straight-line to zero. Sales are projected at 310units per year; price per unit will be $19,200, variable cost perunit will be $13,700, and fixed costs will be $700,000 per year.The required return on the project is 9 percent, and the relevanttax rate is 24 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?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.)

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.)