Question

19. Project Analysis (LO1, 2, 3, 4] You are considering a new product launch. The project will cost $1,700,000, have a four-year life, and have no salvage value: depreciation is straight-line to zero. Sales are projected at 190 units per year; price per unit will be $18,000, variable cost per unit will be $11.200, and fixed costs will be $410,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 35 percent. a. 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 upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios? b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. c. What is the cash break-even level of output for this project (ignoring taxes)? d. What is the accounting break-even level of output for this project? What is the degree of operating leverage at the accounting break-even point? How do you interpret this number?
please help me.. i dont know what to do with this “unit sales vc fc are probably accurate with the +- 10%”.. please help me by giving the precise amount of best worst base case.. thanks

Answer 1

Given,

Project Cost = $ 1,700,000

Project life = 4 years

Salvage Value = 0

Depreciation = 0

Projected Sales = 190 units per year

Price per Unit = $18,000

Variable Cost per unit = $11,200

Fixed Cost = $ 410,000 Per Year

Tax = 35%

Required rate of Return (K) = 12%

a.

	Base Case (BC)	Upper Bound (UB)	Lower Bound (LB)
Projected Sales	190.00	209.00	171.00
Price per Unit	$18,000	$19,800.00	$16,200.00
Variable Cost per unit	$11,200.00	$12,320.00	$10,080.00
Fixed Cost	$410,000.00	$451,000.00	$369,000.00

Upper Bound (UB) = BC * 1.1 --> + 10%

Lower Bound (LB) = BC * 0.9 --> - 10%

Sales	$3,420,000.00
Variable Cost	$2,128,000.00
Fixed Cost	$410,000.00
Depreciation	0
EBIT	$882,000.00
Tax	35.00%
Net Income	$573,300.00

Sales = Price per Unit * Project Sales

Variable cost = Varible cost per unit * Projected Sales

EBIT = Sales - Variable Cost - Fixed Cost - Depreciation

Net Income = EBIT - (EBIT*Tax)

Cash flow = EBIT + Depreciation - Taxes

= $882,000.00 + 0 - $308,700.00

= $573,300.00

NPV Base case = Investment + Cash Flow * ((1 - (1 + K)^-t)/k)

= $ 1,700,000 + $573,300.00 * ((1 - (1 + .12)^-4) / 0.12

= $ 1,700,000 + $573,300.00 * (0.36 / 0.12)

= $ 1,700,000 + $573,300.00 * 3.037

= $ 3,441,312.4

	Worst Case	Best Case
Projected Sales	171.00	209.00
Price per Unit	$19,800.00	$16,200.00
Variable Cost per unit	$12,320.00	$10,080.00
Fixed Cost	$451,000.00	$369,000.00
Depreciation	0	$0.00
Total Sale Value	$3,385,800.00	$3,385,800.00
EBIT	$2,922,480.00	$3,006,720.00
Tax	35.00%	35.00%
Net Income	$1,899,612.00	$1,954,368.00
Case Flow	$1,899,612.00	$1,954,368.00
NPV	$7,469,785.27	$7,636,098.37

C. Cash Break-Even = (FC - Depreciation) / P - V

= ($410,000.00 - 0) / ($18,000 - $11,200) = $410,000.00 / $ 6,800 = 60.29

d.

Accounting Break-Even = (FC) / P - V

= ($410,000.00) / ($18,000 - $11,200) = $410,000.00 / $ 6,800 = 60.29