We are considering a new product launch. The project will cost $790,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 200 units per year; price per unit will be $17,100, variable cost per unit will be $12,600, and fixed costs will be $315,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 35 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. What are the upper and lower bounds for theseprojections? What is the base-case NPV? What are the best-case and worst-case scenarios? Evaluate the sensitivity of your base-case NPV to changes in fixed costs. What is the accounting break-even level of output for this project? Answer on excel files with formulas

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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We are considering a new product launch. The project will cost $790,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 200 units per year; price per unit will be $17,100, variable cost per unit will be $12,600, and fixed costs will be $315,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 35 percent.

  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. What are the upper and lower bounds for theseprojections? What is the base-case NPV? What are the best-case and worst-case scenarios?
  2. Evaluate the sensitivity of your base-case NPV to changes in fixed costs.
  3. What is the accounting break-even level of output for this project?

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