(DONT USE EXCEL PLEASE)

Project Analysis [LO1, 2, 3, 4] You are considering a new product launch. The

project will cost $1,700,000, have a four-year life, and have no salvage value;

depreciation is straight-line to zero. Sales are projected at 190 units per year; price

per unit will be $18,000, variable cost per unit will be $11,200, and fi xed costs will

be $410,000 per year. The required return on the project is 12 percent, and the

relevant tax rate is 35 percent.

a. Based on your experience, you think the unit sales, variable cost, and fi xed 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?

b. Evaluate the sensitivity of your base-case NPV to changes in fi xed costs.

c. What is the cash break-even level of output for this project (ignoring taxes)?

d. What is the accounting break-even level of output for this project? What is the

degree of operating leverage at the accounting break-even point? How do you

interpret this number?