Question

You are considering a new product launch. The project will cost $820,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 490 units per year; price per unit will be $18,400, variable cost per unit will be $15,100, and fixed costs will be $830,000 per year. The required return on the project is 14 percent, and the relevant tax rate is 25 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 amount 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.)

    

    

b.	Calculate the sensitivity of your base-case NPV to changes in fixed costs. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

c.	What is the accounting break-even level of output for this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

    

Answer 1

o Accounting Break even part = fixed cost- Sale Pirie - Variable cost 83000 1840-15 Accounting Break wen pant = 251.52 units

6 Sensitivity Let us the base Analysis assume that : Discounted tran Fixe cost wil traghen by 5% not c.f will be Sales = 490 x 1840 = 90, 16, as Tatal u.c. = 490 X 150 = 73,99,00 Fixed cost +5% = 82000 +5%. = 871570 Dep. esp. 2o00o EBT ' 54050 Tom @ 2511. 135125 Net Inome 40538 2050 Not cash flow 610375 P. v. factos @ 14% 2.914 Discounted cash flows = $17, 78,632.15 11 I. NPV = - = - 82000 + 1778 632.75 $ 9,58,632.15 % change in NPV = $958632.75 - $1099331 $1049331 -0.09 An Increase in f.c.pby 5% will result NPV by 0.09% & vice versa. in tewas in

Y A wout au ! Salu = 490 -10% = 441 Sale Panie 19400 -- 10% = 11560 Vanable cost = 15100 + 10% = 16610 Fixed cost $3000-tp%. = 9130 and dep. = 20000 [82000 147 Initial terrest. = 8200 Tan rote a 25% Reg. Return = 14% 2 Annual cash flow = L (16560-16610x 441 units - 91300) X (1-25%. of 20500x (5) antonnel C.F. - - 701287.5 + 51250 Annud Cof. = 6, 50, 037.5 Worst call NPV = – Initial Invest & P. v. 9 Cash flows. = - $6.2000 + (-650037.5) x 2.914 i= - $27, 14,209.28 I host case 7 B

Best Case Nev sales = 490 +10% = 539 Sale Price per unit -$1846 to% = $50,20 Vayable cost lunt = $15100 - 10% = $13,590 Fixed cost = $830000 - 10% = $74780 weg. lyel - $82000/4 year = $20500 Iritid Invest. = $8200 Tan sate = 25% Reg. Returns = 146 Annrad Cash Flow = Lesale Price - Valuable cost) X Sales (units) - Freda Et rate t) x (1 – tam pote 2) + Aromal Dep. & tan rate Anoord cash flow = (20840-13590) x 539 - 74700 (1-25%) + 20500x25% . Anrind cash flow = $21,79, 862.50 . Best Call = - Initial Investorent & P.v.g cash flours Best case = - 82000 + $ 21,79 262.50 x P. v. q 14% 40 44 Best lase = - 82000 + 21,79, 262.50 x 3.914 Best Call - $ 55,30,370.93

Bass-case Nor Part. sales 90,16 00 Total variable cost 13,99, 00 Fried Cost Svoor 99 . 20 0 C EBT. Tam enp Not I nome Dey. Net cash flow 1 P.N. F. @ 14% 58200 14550 43650 Ovo 64150 0.877 90 16,00 90 16,000 . 90, 16,00 73,99, 00 7399, 00 73,9900 r ow, 83060 w 83000 | 20000 20000 20000 w SERW500 S8200 14550 14550 14551 436500 43650 436500 20 seo Zoro 20500 64150 bylow 64/50 0.77 0.675 0.592 8 Dinamet net cash flow) = $ 18,69 331 (t. Base cose. NP = - 82000 + 18, 69 331 . Bas case NPW = $10,49,331

uppy & Land Bounds ay Part base Case - t what Saly 490 ale lun 18400 Varede Cast 15100 Fixed last 830000 withers 10% eppes Bourd 539 20240 1660 9 Bou 9 Base Case I Loves ours 441 16560 1350 747000