Question

You are considering a new product launch. The project will cost $860,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 250 units per year; price per unit will be $16,500, variable cost per unit will be $11,500, and fixed costs will be $575,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 23 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent.

What are the best-case and worst-case values for each of the projections? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

What are the best-case and worst-case OCFs and NPVs with these projections? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

What are the base-case OCF and NPV? (Do not round intermediate calculations. Round your OCF answer to the nearest whole number, e.g., 32, and round your NPV answer to 2 decimal places, e.g., 32.16.)

What are the OCF and NPV with fixed costs of $585,000 per year? (Do not round intermediate calculations. Round your OCF answer to the nearest whole number, e.g., 32, and round your NPV answer to 2 decimal places, e.g., 32.16.)

What is the sensitivity of your base-case NPV to changes in fixed costs? (Enter your answer as a positive value. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Scenario	Unit Sales	VC	FC
Base	250	11,500	575,000
Best	275	10,350	517,500
Worst	225	12,650	632,500

Base Case NPV

	0	1	2	3	4
Investment	-860,000
Sales		4,125,000	4,125,000	4,125,000	4,125,000
VC		-2,875,000	-2,875,000	-2,875,000	-2,875,000
FC		-575,000	-575,000	-575,000	-575,000
Depreciation		-215,000	-215,000	-215,000	-215,000
EBT		460,000	460,000	460,000	460,000
Tax (23%)		-105,800	-105,800	-105,800	-105,800
Net Income		354,200	354,200	354,200	354,200
OCF	-860,000	569,200	569,200	569,200	569,200
NPV	868,859

Best case NPV

	0	1	2	3	4
Investment	-860,000
Sales		4,537,500	4,537,500	4,537,500	4,537,500
VC		-2,846,250	-2,846,250	-2,846,250	-2,846,250
FC		-517,500	-517,500	-517,500	-517,500
Depreciation		-215,000	-215,000	-215,000	-215,000
EBT		958,750	958,750	958,750	958,750
Tax (23%)		-220,513	-220,513	-220,513	-220,513
Net Income		738,238	738,238	738,238	738,238
OCF	-860,000	953,238	953,238	953,238	953,238
NPV	2,035,315

Worst case NPV

	0	1	2	3	4
Investment	-860,000
Sales		3,712,500	3,712,500	3,712,500	3,712,500
VC		-2,846,250	-2,846,250	-2,846,250	-2,846,250
FC		-632,500	-632,500	-632,500	-632,500
Depreciation		-215,000	-215,000	-215,000	-215,000
EBT		18,750	18,750	18,750	18,750
Tax (23%)		-4,312	-4,312	-4,312	-4,312
Net Income		14,437	14,437	14,437	14,437
OCF	-860,000	229,438	229,438	229,438	229,438
NPV	-163,118