Question

You are considering a new product launch. The project will cost $1,750,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 220 units per year; price per unit will be $20,000, variable cost per unit will be $13,000, and fixed costs will be $500,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 34 percent. a. The unit sales, variable cost, and fixed cost projections given above are probably accurate to within ±10 percent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your NPV answers to 2 decimal places, e.g., 32.16.) Scenario Upper bound Lower bound Unit sales units Variable cost per unit $ $ Fixed costs $ $ Scenario NPV Base-case $ Best-case $ Worst-case $ b. Calculate the sensitivity of your base-case NPV to changes in fixed costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) ΔNPV/ΔFC $ c. What is the accounting break-even level of output for this project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Accounting break-even units

Answer 1

sales Sale Variable Contributi Fixed Year units price Deprecia Operating Total cash PVIF@15 cost on per unit Tax@34% |PAT Depreciation cash flows Investment flows Present value 0 1220 20,000 13,0007,000 500,000 437,500 602,500 204,850 397,650437,500835,150 000 500,000 437,500 602,500 204,850 397,650 437,500 835,150 437,500835,150 835,1500.870 835,1500.75 835,1500.572 726,217 631,493 549,125 477,500 20 20,000 13,000 220 20,000 13,000 7,000 500,000 437,500 602,500204,850 397,650 7 Base case NPV 634,335 Sales Sale Variable Contributi FixedDeprecia Operating Total cash PVIF@1 Tax@34% |PAT Depreciation cash flows Investment flows Present value 2 7,000 510,000 437,500 592,500 201,450 391,050 437,500 828,550 7,000 510,000437,500 592,500 201,450 391,050437,500 828,550 437,500828,550 437,500 828,550 828,5500.870 828,550 0.756 828,5500.658 828,5500.572 220 20,000 13,000 720,478 626,503 544,785 473,726 7,000 510,000437,500 592,500 201,450 391,050 7,000 510,000 437,500 592,500 201,450 391,050 17 NPV with fixed costs chang 615,492

Operating Total cash Sales Sale Variable Contributi Fixed Deprecia Tas@34% |PAT Depreciation cash flows Investment flows Present value 1,750,000) (1,750,000)1.000 $(1,750,000.00 1,1774260.870 $1,023,848.70 1,1774260.756S 890,303.21 1,177,426 0.658 774,176.71 1,177,426 0.572 673,197.14 20 0 8,300 450,000437,500 1,121,100 381,174 739,926 437,500 1,177,426 242 20,000 11,700 23 3 24220,000 11,700 100 381,174 739,926 437,500 1,177.426 8,300 450,000 437,500 1,121,1 25 26 27 Best case NPV S 1,611,525.75 Sales Sale Variable Contributi Fixed Deprecia Operating Total cash PVIF@15 28 Year units price cost on per uttion Tan@34% Present value 29 30 1198 20,000 $14,300 $5,700.00 550,000 437,500141,100 47,97493,126437,500 31 198 20,000 $14,300 $5,700.00 550,000 437,500 141,10047,974 93,126 (1.750,000) 1,750,000) 1.000 S(1,750,000.00 530,6260.870 461,413.91 530,626 0.756 $ 401,229.49 530,626 0.658 348,895.21 530,626 0.572 $ 303,387.14 437,500530,626 00 530,626 437,500 530,626 33| 34 35 4| 198 | 20,000 | $14,300 | $5,700.00 | 550,000 | 437,500 | 141,100 47,974 | 93,126 Worst case NPV $(235,074.25

E49 f(F3+G3)/E3 37 a Lower bound Scenario Units sales Variable cost per unit $ Fixed costs Upper bound 38 242 198 units 11,700 550,000 $ 450,000 14,300 40 Scenario Base Best Worst NPV 43 634,335.18 1,611,525.75 235,074.25 45 46 47 b) ANPV/AFC 48 49 c)Accounting break-even 1.88 133.93