You are considering a new product launch. The project will cost 460,000, have a 4-year life, and
Question:
You are considering a new product launch. The project will cost £460,000, have a 4-year life, and have no salvage value; depreciation is 20 per cent reducing balance. Sales are projected at 150 units per year; price per unit will be £24,000; variable costs are 75 per cent of sales; and fixed costs will be £200,000 per year. The required return on the project is 15 per cent, and the relevant tax rate is 24 per cent.
(a) Based on your experience, you think the unit sales, variable cost and fixed cost projections given here are probably accurate to within ±10 per cent. 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?
(b) Evaluate the sensitivity of your base-case NPV to changes in fixed costs.
(c) What is the accounting break-even level of output for this project?
Step by Step Answer:
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe