Question

You are considering a new product launch. The project will cost $780,000, have a four- year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 170 units per year, price per unit will be $16,300, variable cost per unit will be $11,100, and fixed costs will be $535,000 per year. The required return on the project is 11 percent, and the relevant tax rate is 21 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. a. What are the best and worst case NPVs with these projections? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. What is the base-case NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the sensitivity of the NPV to changes in fixed costs? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Best-case NPV Worst-case NPV Base-case NPV ΔNPV/ΔFC

Answer 1

G3 - fc X C ✓ D =+M2*-0.25 E A B LG Variable contra G H Depreciat ion PBT 1 Year Wales Sale cost per unit costs 1 Year units price 20 1 170 16,300 4 2 170 16,300 3 170 16,300 4 170 16,300 7 mo I J K L M N O P Depreciat Operating Total cash PVIF@ Tax@21% PAT i on cash flows Investment flows 11% Present value (780,000) (780,000) 1.000 $ (780,000.00) 32.340 | 121.660 | 195.000 316,660 316,660 0.901 $ 285,279.28 32,340 121,660 195,000 316,660 316,660 0.812 $ 257,008.36 32,340 | 121,660 195,000 316,660 316,660 0.731 $ 231,539.06 32,340 | 121,660 195,000 316,660 316,660 0.659 $ 208,593.75 11,100 11,100 11,100 11,100 5,200 5,200 5,200 5,200 535,000 535,000 535,000 535,000 195,000 195,000 195,000 195,000 154,000 154,000 154,000 154,000 Base case NPV $ 202,420.45 Variable Contributio Fixed cost in per unit costs Depreciat Jion PBT 9 Sales Sale 10 Year units price 11 0 12 1 170 16,300 2 170 16,300 3 170 16,300 4 170 16,300 11,100 11,100 11,100 11,100 5,200 545,000 5,200 | 545,000 5,200 545,000 5,200 545,000 195,000 195,000 195,000 195,000 144,000 144,000 144,000 144,000 Depreciat Operating Total cash PVIF@ Tax@21% PAT lion cash flows Investment flows 11% Present value (780,000)| (780,000) 1.000 $ (780,000.00) 30,240 113,760 195,000 308,760 308,760 0.901 $ 278,162.16 30,240 | 113,760 195,000 308,760 308,760 0.812 $ 250,596.54 30,240 113,760 195,000 308,760 308,760 0.731 $ 225,762.65 30,240 | 113,760 195,000 308,760 308,760 0.659 $ 203,389.78 15 16 NPV with FC change $ 177,911.13 Variable Contributio Fixed cost in per unit costs Depreciat i on PBT 17 18 Sales Sale 19 Year units price 20 o 21 1 187 | 16,300 22 2 187 | 16,300 3 187 | 16,300 24 4 187 | 16,300 9,990 9,990 9,990 9,990 11 6,310 6,310 6,310 6,310 481,500 481,500 481,500 481,500 Depreciat Operating Total cash PVIF@ Tax@21% PAT lion cash flows Investment flows 11% Present value (780,000) (780,000) 1.000 $ (780,000.00) 105,729397,741 195,000 592,741 592,741 0.901 $ 534,001.17 105,729397,741 195,000 592,741 592,741 0.812 $ 481,082.14 105,729397,741 195,000 592,741 592,741 0.731 $ 433,407.33 105,729397,741 195,000 592,741 592,741 0.659 $ 390,457.05 195,000 503,470 195,000 503,470 195,000 503,470 195,000 503,470 Best case NPV $ 1,058,947.69

E40 - X fx --(P8-P17)/10000 A B C D E G H I J K L M N O P Sales Sale Variable Contribution Fixed Depreciat Depreciat Operating Total cash PVIF@ 28 Year units price cost per unit costs Jion PBT Tax@21% PAT lion cash flows Investment flows 11% Present value 29 01 (780,000) (780,000) 1.000 $ (780,000.00) 30 1 153 16,300 $ 12,210 $ 4,090 588,500 195,000 (157,730) (33,123) (124,607) 195,000 70,393 70,393 0.901 $ 63,417.39 31 2 153 16,300 $ 12,210 $ 4,090 588,500 195,000 (157,730) (33,123) (124,607) 195,000 70,393 70,393 0.812 $ 57,132.78 32 3 153 16,300 $ 12,210 $ 4,090 588,500 195,000 (157,730) (33,123) (124,607) 195,000 70,393 70,393 0.731 $ 51,470.97 33 4 153 16,300 $ 12,210 $ 4,090 588,500 195,000 (157,730) (33,123) (124,607) 195,000 70,393 70,393 0.659 $ 46,370.25 34 35 Worst case NPV $ (561,608.61) 36 st case NPV 38 -S56 37 a) Best-case NPV $1,058,947.69 Worst-case NPV ,608.61 39 b) Base-case NPV / $ 202,420.45 40 c) ANPV/AFC -$2.45

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