You are considering a new product launch. The project will cost $2,350,000, have a four- year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 330 units per year, price per unit will be $19,600, variable cost per unit will be $14,000, and fixed costs will be $720,000 per year. The required return on the project Is 10 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 here are probably accurate to within 10 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. Round your NPV answers to 2 decimal places, e.g., 32.16. Round your other answers to the nearest whole number, e.g. 32.) Scenario Base Best Worst Unit Sales 330 363 297 Answer is complete and correct. Variable Cost 14.000 12,600 15,400 s b. ANPVIAFC c. Cash break-even d-1. Accounting break-even d-2. Degree of operating leverage S Fixed Costs Answer is not complete. s b. Evaluate 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.) c. What is the cash break-even level of output for this project (ignoring taxes)? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d-1. What is the accounting break-even level of output for this project? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d-2. What is the degree of operating leverage at the accounting break-even point? (Do not round Intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) 720,000 648,000 792,000 2.50 s 233.48 NPV 865,812.65 2,781,520.83 -818,508.04

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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You are considering a new product launch. The project will cost $2,350,000, have a four-
year life, and have no salvage value; depreciation is straight-line to zero. Sales are
projected at 330 units per year; price per unit will be $19,600, variable cost per unit will
be $14,000, and fixed costs will be $720,000 per year. The required return on the project
Is 10 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 here are probably accurate to within 10 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. Round your NPV answers to
2 decimal places, e.g., 32.16. Round your other answers to the nearest whole
number, e.g. 32.)
Scenario
Base
Best
Worst
Unit Sales
330
363
297
Answer is complete and correct.
Fixed Costs
Variable Cost
$
b. ANPV/AFC
c. Cash break-even
d-1. Accounting break-even
d-2. Degree of operating leverage
14,000 |$
12,600
15,400
Answer is not complete.
b. Evaluate 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.)
c. What is the cash break-even level of output for this project (ignoring taxes)? (Do not
round Intermediate calculations and round your answer to 2 decimal places, e.g.,
32.16.)
720,000
648.000
792,000
d-1. What is the accounting break-even level of output for this project? (Do not round
Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
d-2. What is the degree of operating leverage at the accounting break-even point? (Do
not round Intermediate calculations and round your answer to 3 decimal places,
e.g., 32.161.)
2.50
$
233.48
NPV
865,812.65
2,781,520.83
-818,508.04
Transcribed Image Text:You are considering a new product launch. The project will cost $2,350,000, have a four- year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 330 units per year; price per unit will be $19,600, variable cost per unit will be $14,000, and fixed costs will be $720,000 per year. The required return on the project Is 10 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 here are probably accurate to within 10 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. Round your NPV answers to 2 decimal places, e.g., 32.16. Round your other answers to the nearest whole number, e.g. 32.) Scenario Base Best Worst Unit Sales 330 363 297 Answer is complete and correct. Fixed Costs Variable Cost $ b. ANPV/AFC c. Cash break-even d-1. Accounting break-even d-2. Degree of operating leverage 14,000 |$ 12,600 15,400 Answer is not complete. b. Evaluate 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.) c. What is the cash break-even level of output for this project (ignoring taxes)? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) 720,000 648.000 792,000 d-1. What is the accounting break-even level of output for this project? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d-2. What is the degree of operating leverage at the accounting break-even point? (Do not round Intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) 2.50 $ 233.48 NPV 865,812.65 2,781,520.83 -818,508.04
Expert Solution
Step 1

The process that analyzes and evaluates any project's feasibility and profitability is capital budgeting. It is employed to decide whether to accept or reject a project or to choose between the various alternatives available. The excess of cash flow's current worth over the initial investment is any project's NPV. The study of impact that any change in the inputs have on the output indicates sensitivity analysis.

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