Project anlaysis based on NPV.
You are considering a new product launch. The project will cost $870,000, have a 4-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 $20,000, variable costs per unit will be $16,000 and fixed costs will be $348,000 per year. The required return on project is 15 percent, and the relevant tax rate is 36 percent.
Required:
(a) Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to ±11 percent. Determine the upper or lower bounds of these projections. The base-case NPV is $_____. The best-case NPV is $_____ and the worst-case NPV is $_____. (Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places, e.g. 32.16)
|
Upper bound
|
Lower bound
|
|
Unit sales
|
|
|
|
Variable cost per unit
|
$
|
$
|
|
Fixed costs
|
$
|
$
|
(b) The sensitivity of your base-case NPV to change in fixed costs is $_____. (Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places, e.g. 32.16)
(c) The cash break-even level of output for this project (ignoring taxes) is _____ units. (Round your answers to 2 decimal places, e.g. 32.16)
(d) The accounting break-even level of output for this project is _____ units. (Round your answer to the nearest whole number, e.g. 32.) The degree of operating leverage at the accounting break-even point is _____ units. (Round your answers to 2 decimal places, e.g. 32.16.) Thus, foe every 1% increase in unit sales, OCF will change by _____ percent. (Do not include the percent sign (%). Round your answers to 2 decimal places, e.g. 32.16.)