Question

You are considering a new product launch. The project will cost $1,700,000, have a 4-year life, and have no salvage value; depreciation is straight-line to O. Sales are projected at 140 units per year; price per unit will be $22,000; variable cost per unit will be $12.500; and fixed costs will be $490,000 per year. The required return on the project is 10%, and the relevant tax rate is 32%. a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within +10%. 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? (Negative answers should be indicated by a minus sign. Do not round Intermediate calculations. Round the final NPV answers to 2 decimal places. Omit $ sign in your response.) Scenario Base Unit Sales 3080000 Variable Cost 1750000 Fixed Costs 490000 NPV 541728.84 % Best 2772000 1417500 1441000 700158.721 Worst 3388000® 12117500 x $ 539000 307856.17 b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to 3 decimal places. Omit $ sign in your response.) ANPV/AFC $48.44 c. What is the cash break-even level of output for this project (ignoring taxes)? (Round the final answers to the nearest whole unit.) Cash break-even 51.57 units d-1. What is the accounting break-even level of output for this project? (Round the final answers to the nearest whole unit.) Accounting break-even 96.32 units d-2. What is the degree of operating leverage at the accounting break-even point? (Round the final answer to 4 decimal places.) Degree of operating leverage 2.153

Forst Chef Question had holes and gave incorrect answers. Please correct ?

Answer 1

H PBT G3 : x V for =+M2*-0.25 A B C D E G Sales Sale Variable Contributi Fixed Deprecia 1 Year units price cost on per unit costs tion 2 0 3 1 140 22,000 12,500 9,500 490,000 425,000 4 2 140 22,000 12,500 9,500 490,000 425,000 3 140 22,000 12,500 9,500 490,000 425,000 6 4 140 22,000 12,500 9,500 490,000 425,000 I J K L M N O P Depreciat Operating Total cash PVIF@ Tax@32% PAT lion cash flows Investment flows 10% Present value (1,700,000) (1,700,000) 1.000 $(1,700,000.00)| 132,800 282,200 425,000 707,200 707,200 0.909 $ 642,909.09 132,800 282,200 425,000 707,200 707,200 0.826 $ 584,462.81 132,800 282,200 425,000 707,200 707,200 0.751 $ 531,329.83 132,800 282,200 425,000 707,200 707,200 0.683 $ 483,027.12 415,000 415,000 415,000 415,000 5 7 Base case NPV $ 541,728.84 9 Variable Contributi Fixed cost on per unit costs Deprecia tion PBT Tax@32% PAT Sales Sale 10 Year units price 11 0 12 1 140 22,000 13 2 140 22,000 14 3 140 22,000 15 4 140 22,000 16 12,500 12,500 12,500 12,500 9,500 9,500 9,500 9,500 500,000 425,000 500,000 425,000 500,000 425,000 500,000 425,000 405,000 405,000 405,000 405,000 129,600 129,600 129,600 129,600 275,400 275,400 275,400 275,400 Depreciat Operating Total cash PVIF@ ion cash flows Investment flows 10% Present value (1,700,000) (1,700,000) 1.000 $(1,700,000.00)| 425,000 700,400 700,400 0.909 $ 636,727.27 425,000 700,400 700,400 0.826 $ 578,842.98 425,000 700,400 700,400 0.751 $ 526,220.89 425,000 700,400 700,400 0.683 $ 478,382.62 17 NPV with FC change $ 520,173.76 Variable Contributi Fixed cost on per unit costs Deprecia tion PBT Tax@32% PAT 18 Sales Sale 19 Year units price 20 o 1 154 22,000 2154 22,000 3 154 22,000 24 4 154 22,000 25 11,250 11,250 11,250 11,250 10,750 10,750 10,750 10,750 441,000 425,000 441,000 425,000 441,000 425,000 441,000 425,000 789,500 252,640 536,860 789,500 252,640 536,860 789,500 252,640 536,860 789,500 252,640 536,860 Depreciat Operating Total cash PVIF@ ion cash flows Investment flows 10% Present value (1,700,000) (1,700,000) 1.000 $(1,700,000.00) 425,000 961,860 961,860 0.909 $ 874,418.18 425,000 961,860 961,860 0.826 $ 794,925.62 425,000 961,860 961,860 0.751 $ 722,659.65 425,000 961,860 961,860 0.683 $ 656,963.32 Best case NPV $1,348,966.78

I J Tax@32% PAT imene Total K L M N O P Depreciat Operating Total cash PVIF@ ion cash flows Investment flows 10% Present value (1,700,000) (1,700,000) 1.000 $(1,700,000.00) 425,000 476,340 476,340 0.909 $ 433,036.36 425,000 476,340 476,340 0.826 $ 393,669.42 425,000 476,340 476,340 0.751 $ 357,881.29 425,000 476,340 476,340 0.683 $ 325,346.63 24,160 24,160 24,160 24,160 51,340 51,340 51,340 51,340 L Worst case NPV $ (190,066.29) A B C D E F G H Sales Sale Variable Contributi Deprecia 28 Year units price cost on per unit Fixed costs tion PBT 29 0 1 126 22,000 $13,750$ 8,250 539,000 425,000 75,500 2 126 22,000 $13,750$ 8,250 539,000 425,000 75,500 3 126 22,000 $13,750 $ 8,250 539,000 425,000 75,500 4 126 22,000 $13,750$ 8,250 539,000 425,000 75,500 34 35 L L L 36 Unit Variable 37 Scenario sales cost Fixed costs NPV 38 Base 140 $ 12,500 $ 490,000 $ 541,728.84 39 Best 154 $ 11,250 $ 441,000 $ 1,348,966.78 40 Worst L 126 $ 13,750 $ 539,000 $190,066.29 41 42 ANPV/AFC -$2.16 =(P17-P8)/10000 43 Cash break-even 51.58 =F3/(E3) 44 Accounting break-even 96.32 =(F3+G3/E3 45 Degree of operating leverage 2.1529 =1+F3/G3

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