You are considering a new product launch. The project will cost $830,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 470 units per year, price per unit will be $18,500, variable cost per unit will be $15,200, and fixed costs will be $845,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 21 percent. a. The unit sales, variable cost, and fixed cost projections given above 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 amount 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.) Upper bound Lower bound Unit sales 517 423 Variable cost per unit $ 16,720 $ 13,680 Fixed costs $ 929,500 $ 760,500 Base-case $ 1,076,088.00 Best-case $ 3,643,988.00 Worst-case $ -1,134,014.00 b. Calculate the sensitivity of your base-case NPV to changes in fixed costs. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) c. 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.) b. ANPV/AFC c. Accounting break-even units
You are considering a new product launch. The project will cost $830,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 470 units per year, price per unit will be $18,500, variable cost per unit will be $15,200, and fixed costs will be $845,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 21 percent. a. The unit sales, variable cost, and fixed cost projections given above 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 amount 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.) Upper bound Lower bound Unit sales 517 423 Variable cost per unit $ 16,720 $ 13,680 Fixed costs $ 929,500 $ 760,500 Base-case $ 1,076,088.00 Best-case $ 3,643,988.00 Worst-case $ -1,134,014.00 b. Calculate the sensitivity of your base-case NPV to changes in fixed costs. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) c. 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.) b. ANPV/AFC c. Accounting break-even units
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:You are considering a new product launch. The project will cost $830,000, have a 4-year
life, and have no salvage value; depreciation is straight-line to zero. Sales are projected
at 470 units per year, price per unit will be $18,500, variable cost per unit will be $15,200,
and fixed costs will be $845,000 per year. The required return on the project is 10
percent, and the relevant tax rate is 21 percent.
a. The unit sales, variable cost, and fixed cost projections given above 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 amount 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.)
Upper bound
Lower bound
Unit sales
517
423
Variable cost per unit
$
16,720 $
13,680
Fixed costs
$
929,500 $
760,500
Base-case
$
1,076,088.00
Best-case
$
3,643,988.00
Worst-case
$
-1,134,014.00
b. Calculate the sensitivity of your base-case NPV to changes in fixed costs. (A
negative amount should be indicated by a minus sign. Do not round intermediate
calculations and round your answer to 3 decimal places, e.g., 32.161.)
c. 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.)
b. ANPV/AFC
c. Accounting break-even
units
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