You are considering a new product launch. The project will cost $1,675,000, 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 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 is the NPV for 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 Unit Sales Variable Cost Fixed Costs NPV Base Best Worst 195 $ 9,400 $ 550,000 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.)
You are considering a new product launch. The project will cost $1,675,000, 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 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 is the NPV for 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 Unit Sales Variable Cost Fixed Costs NPV Base Best Worst 195 $ 9,400 $ 550,000 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.)
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter26: Real Options
Section: Chapter Questions
Problem 3P: Wansley Lumber is considering the purchase of a paper company, which would require an initial...
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Transcribed Image Text:You are considering a new product launch. The project will cost $1,675,000, 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 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 is
the NPV for 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
Unit Sales
Variable Cost
Fixed Costs
NPV
Base
195 $
9,400 $
550,000
Best
Worst
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.)
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 2 decimal places,
e.g., 32.16.)
C.
| b. ΔΝPV/ΔFC
c. Cash break-even quantity
d-1. Accounting break-even quantity
d-2. Degree of operating leverage
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