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Project analysis. You are considering a new product launch. The-(Answered)

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Project analysis. You are considering a new product launch. The project will cost $1,400,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 180 units per year; price per unit will be $16,000 , variable cost per unit will be $9,800, and fixed costs will be $430,000 per year. The required return on the project is 12% and the relevant tax rate is 35%.

  • 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 base-case and worst-case scenarios?
  • Evaluate the sensitivity of your base ?case NPV to changes in fixed costs.
  • What is the cash break-even level of output for this project (ignoring taxes)?
  • 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?

Unit Sales

 

Variable Cost

 

Fixed cost

 

Unit Sale Price

 

Tax rate

 

Discounting rate

 

Base Case

 

Particulars

 

Cash outflow

 

Sales revenue

 

Less - variable costs

 

Less - fixed costs

 

Less - depreciation

 

Earnings...

 

Paper#9210174 | Written in 27-Jul-2016

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