You are considering a ne w product launch. The project will cost $680,000, have a four – year life, and have no salvage value; depreciation is straight – line to zero. Sales are projected at 160 units per year , price per unit will be $19,000, variable cost per unit will be $14,000, an d fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%.
a. Based on your experience, the unit sales, variable cost, and fixed cost projections given here are probably accurate to within +/- 10%. What are the upper and lower bounds for these projections for unit sales, variable cost, and fixed cost?
b. What is the base – case NPV?
c. What are the NPVs in the best – case and worst – case scenarios?
d. Evaluate the sensitivity of your base – case NPV to changes in fixed costs.
e. What is this project’s cash break – even level of output (ignoring taxes)?
f. What is the accounting break even level of output for this project, and what is the degree of operating leverage (DOL) at the accounting break-even point? How do you interpret this DOL number?
