$-$Problem $7-13$ Project Analysis

You are considering a new product launch. The project will cost $$840,000,$ have a $4-$year

life, and have no salvage value; depreciation is straight$-$line to zero. Sales are projected

at $500$ units per year, price per unit will be $$18,600,$ variable cost per unit will be

$$15,300,$ and fixed costs will be $$860,000$ per year. The required return on the project is

$11$ percent, and the relevant tax rate is $22$ 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? $($A negative amount should be indicated by a minus sign. Do not round

intermediate calculations and round your NPV answers to $2$ decimal places, e$.$g$.,$

$32\mathrm{.}16.)$

b$.$ Calculate the sensitivity of your base$-$case NPV to changes in fixed costs. $($A

negative amount should be indicated by a minus sign. Do not round intermediate

calculations and round your answer to $3$ decimal places, e$.$g$.,32\mathrm{.}161.)$

c$.$ 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$.,32\mathrm{.}16.)$ You are considering a new product launch. The project will cost $$840,000,$ have a $4-$year life, and have no salvage value; depreciation is straight$-$line to zero. Sales are projected at $500$ units per year, price per unit will be $$18,600,$ variable cost per unit will be $$15,300,$ and fixed costs will be $$860,000$ per year. The required return on the project is $11$ percent, and the relevant tax rate is $22$ percent.

The unit sales, variable cost, and fixed cost projections given above are probably accurate to within $\backslash$pm $10$ 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?