Question

You are considering a new product launch. The project will cost $750,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 210 units per year; price per unit will be $17,750, variable cost per unit will be $13,400, and fixed costs will be $375,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 35 percent.

Requirement 1:

Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent.

(a)	What are the best and worst case NPVs with these projections? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

NPVbest	$
NPVworst	$

(b)	What is the base-case NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

NPVbase

$

Requirement 2:

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

For every dollar FC increase, NPV falls by $ .

Answer 1