Question

You are considering a new product launch. The project will cost $780,000, have a four- year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 170 units per year, price per unit will be $16,300, variable cost per unit will be $11,100, and fixed costs will be $535,000 per year. The required return on the project is 11 percent, and the relevant tax rate is 21 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within 110 percent. a. What are the best and worst case NPVs with these projections? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. What is the base-case NPV? (Do not rouwd intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the sensitivity of the 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 2 decimal places, e.g., 32.16.) Best-case NPV Worst-case NPV b. Base-case NPV C. ANPVIAFC

Answer 1

A B 1 Year Sales units ion % 0 C D E F G H J K L M N O P Contribut Operatin Total Variable ion per Fixed Depreciat tax @ Depreciatg cash Investme cash PVIF@11 Present Sales price cost unit costs ion PBT 21% PAT flows nt flows value -780000 -780000 -780000 170 163001 11100 5200 535000 195000 154000 323401 121660 1950001 316660 316660 0.901 285279.28 170 163001 11100 5200 535000 195000 154000 32340 121660 195000 316660 316660 0.812 257008.36|| 170 16300 11100 5200 535000 195000 154000 32340 121660 195000 316660 316660 0.731 231539.06|| 170 16300 11100 5200 535000 195000 154000 32340 121660 195000 316660 316660 0.659 208593.75 Base case NPV 202420.45 رانيا س nm + 600 3 4 9 Year Sales units 1% 0 170) Contribut Operatin Total Variable ion per Fixed Depreciat tax @ melrash Depreciatg cash Investme cash PVIF@11 Present Sales price cost unit costs ion PBT 21% PAT Jion flows nt flows value -780000 -780000 1 -780000 16300 11100 52001 535000 195000 144000 302401 113760 195000 308760 308760 0.901| 278162.16|| 16300 111001 5200 535000 195000 144000 30240 113760 195000 308760 308760 0.812 250596.54 170 16300 11100 5200 535000 195000 144000 302401113760 195000l 308760 3087601 0.731 225762.65 16300 11100 5200 535000 195000 1440001 30240113760 195000l 308760 308760 0.659 203389.78| NPV with FC change 177911.131 170 Nm VO 170

17 Year Contribut Operatin Total Variable ion per Fixed Depreciat tax @ Depreciatg cash Investme cash PVIF@11 Present Sales units Sales price cost unit costs ion PBT 21% PAT lion flows nt flows % value 0 -780000 -780000 1. -780000 170 16300 11100 5200 535000 195000 503470 105729397741 195000 592741 592741 0.901 534001.17|| 21170 16300 11100 5200 535000 195000 503470 105729397741 195000 592741 592741 0.812 481082.14 3 170 16300 11100 5200 535000195000 503470 105729) 397741 195000 592741 592741 0.731 433407.33) 4 170 16300 11100 5200 535000 195000 503470 105729) 397741 195000 592741 592741 0.659 390457.05 Base case NPV 1058947.69 25 Year Sales units ion ion Contribut Operatin Total Variable ion per Fixed Depreciat tax @ Depreciat g cash Investme cash PVIF@11 Present Sales price cost unit costs PBT 21% PAT flows nt nt flows value -780000 -780000 1 -780000 170 16300 11100 5200 535000l 195000 -157730 -33123 124607) 195000 70393 70393 0.901 63417.39 16300 11100 5200 5350001950001 -157730 -33123 -124607195000 70393 703931 0.81257132.78 16300 111001 5200 535000 195000 -157730 -33123 -124607195000 70393 703931 0.731 51470.97| 16300 11100 5200 535000 195000 -157730 -33123 -124607) 195000 70393 70393 0.659 46370.25 Worst case NPV -561608.61 170) 170) 170)

32 33 a) 34 Best-case NPV 1058947.7 Worst-case NPV -561608.61 Base-case NPV 202420.45 ANPV/AFC -2.45 (202420.45-117911.13)/10000 35 b) 36 c) 37