Question

need to see how you got to the answer

6) 25 Points You are considering a new prod uct launch, The project will cost $982.000, have a four-year life, and have no salvage value. The depreciation is straight-line to zero. Sales are projected at 300 units per year. The pnce per unit is $19,200, the variable cost per unit is $15.700. and fixed costs are $328,000 per year. The required return on the project is 12 %, and the relevant tax rate is 40 % . Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within + (best case) or-(worst case) of 10%. Partially filled out Scenario inputs: Scenario Best (+10%) Price/unit $19,200 Cost/unit $14,130 Fixed Cost Units $328,000 $360,800 Base $19,200 $19,200 $15,700 300 Worst (-10%) 270 What are the best case and worst case OCFS (A) and (B)? What are the best case and worst case NPVS (C) and (D)? OCF NPV (A) (C) Best Case $632,047.44 $531,400 Base Case (B) (D) Worst Case

Answer 1

a. filling partially filled out scenario inputs:

sales units best case: +10%*300 = 30, total sales units best case= 300+30 =330

Fixed cost best case: -10%*328000 = 32800, total fixed cost best case = 328000-32800 = 295200

cost/unit worst case: -10%*15700=1570, total cost/unit worst case = 15700+1570 = 17270

Note: cost gets added for worst case, and costs gets reduced for best case.

the scenario table would be as follows:

scenario	units	price/unit	cost/unit	fixed cost
best(+10%)	330	19200	14130	295200
base	300	19200	15700	328000
worst(-10%)	270	19200	17270	360800

operational cash flows formula= (sales -cost -depreciation)*(1-T) + Depreciation

here, depreciation = (982000-0)/4 = 245500 per yr

for best case: sales price = 330*19200 = 6336000

total cost = 330*14130 + 295200 = 4958100

A.OCF for best case = (6336000-4958100-245500)*(1-0.4) + 245500 = 924940

B.similarly for OCF for worst case = (5184000-5023700-245500)*(1-0.4) + 245500 = 194380

NPV = -intial investment + OCF/(1+r)^n , here n =4, r = 12%, initial investment = 982000, OCF is given above for each of the four yrs,

D.NPV for best case = -982000+ (924940/1.12^1) +(924940/1.12^2) +...….(924940/1.12^4) = -1827365.9

C.NPV for worst case = -928000+ (194380/1.12^1)………(194380/1.12^4) = -391600.03