You are considering a new product launch. The project will cost $1.675 million, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 195 units per year, price per unit will be $16,300, variable cost per unit will be $9,400; and fixed costs will be $550,000 per year. The required return on the project is 12 percent and the relevant tax rate is 21 percent. a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given above are probably accurate to within 110 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? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your NPV answers to 2 decimal places, e.g., 32.16.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT
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Publisher:MOYER
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 13P
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You are considering a new product launch. The project will cost $1.675 million,
have a four-year life, and have no salvage value; depreciation is straight-line to
zero. Sales are projected at 195 units per year; price per unit will be $16,300,
variable cost per unit will be $9,400; and fixed costs will be $550,000 per year.
The required return on the project is 12 percent and the relevant tax rate is 21
percent.
a. Based on your experience, you think the unit sales, variable cost, and fixed
cost projections given above are probably accurate to within 110 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? (A
negative answer should be indicated by a minus sign. Do not round
intermediate calculations and round your NPV answers to 2 decimal
places, e.g., 32.16.)
Scenario
Unit sales
Variable cost
per unit
Fixed costs
Scenario
Base-
case
Best-
case
Worst-
case
Upper
bound
215
$ 605,000X
NPV
$ 500,903.92
$ 349,768.94
b. ANPV/AFC
c. Accounting
break-even
Lower
bound
b. Calculate the sensitivity of your base-case 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.)
xx
176 units
c. What is the accounting break-even level of output for this project? (Do not
round intermediate calculations and round your answers to 2 decimal
places, e.g., 32.16.)
x
X units
Transcribed Image Text:You are considering a new product launch. The project will cost $1.675 million, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 195 units per year; price per unit will be $16,300, variable cost per unit will be $9,400; and fixed costs will be $550,000 per year. The required return on the project is 12 percent and the relevant tax rate is 21 percent. a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given above are probably accurate to within 110 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? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your NPV answers to 2 decimal places, e.g., 32.16.) Scenario Unit sales Variable cost per unit Fixed costs Scenario Base- case Best- case Worst- case Upper bound 215 $ 605,000X NPV $ 500,903.92 $ 349,768.94 b. ANPV/AFC c. Accounting break-even Lower bound b. Calculate the sensitivity of your base-case 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.) xx 176 units c. What is the accounting break-even level of output for this project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) x X units
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