Question: I could not get part B. Here is the rest of my work for part A. You are considering a new product launch. The project
I could not get part B. Here is the rest of my work for part A.
| You are considering a new product launch. The project will cost $2,400,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 180 units per year; price per unit will be $30,000, variable cost per unit will be $19,500, and fixed costs will be $630,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 35 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? |
| Scenario | Upper bound | Lower bound | |
| Unit sales | 198 | 162 | |
| Variable cost per unit | $ 21450 | $ 17550 | |
| Fixed costs | $ 693000 | $ 567000 | |
| Scenario | NPV |
| Base-case | $ 725432.48 |
| Best-case | $ 1985218.68 |
| Worst-case | $ -395759.47 |
| b. | Calculate the sensitivity of your base-case NPV to changes in fixed costs.
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