Question

You are considering a new product launch. The project will cost $960,000, have a 5-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 350 units per year; price per unit will be $15,955, variable cost per unit will be $12,000, and fixed costs will be $625,000 per year. The required return on the project is 10 percent and the relevant tax rate is 23 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent.
a.	What are the best-case and worst-case NPVs with these projections? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b.	What is the base-case NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
c.	What is the sensitivity of your base-case NPV to changes in fixed costs? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

fx =+M2*-0.2 G3 A B с D E н J K M N о Sales Sale PVIF@ Present 10% Variable Contributio Fixed Depreciati Operating Total cash Depreciat |Таx@23% РАТ Year units price 1 ion cash flows flows value РBT Investment cost costs n per unit on (960,000) 1.000 628,783 0.909 628,783 0.826 628,783 0.751 628,783 0.683 628,783 0.621 2 (960,000) (960,000) 0 12,000 628,783 3 15,955 192,000 1 350 3,955 625,000 192,000 567,250 130,468 436,783 571,620 3,955 625,000 3,955 625,000 3,955 625,000 3,955 625,000 4 192,000 130,468 436,783 519,655 2 350 15,955 12,000 567,250 192,000 628,783 5 472,414 350 15,955 12,000 192,000 567,250 130,468 436,783 192,000 628,783 567,250 628,783 4 350 15,955 12,000 192,000 130,468 436,783 192,000 429,467 7 567,250 628,783 390,424 5 350 15,955 12,000 192,000 130,468 436,783 192,000 8 9 1,423,580 Base case NPV 10 Sales Sale 11 Year units price Variable Contributio Fixed PVIF@ Present 10% Depreciati Operating Total cash Depreciat |Таx@23% cash flows Investment flows value ion РBT PAT cost costs n per unit on (960,000) 1.000 621,083 0.909 621,083 0.826 12 (960,000) (960,000) 564,620 0 128,168 429,083 3,955635,000 3,955 635,000 3,955 635,000 192,000 3,955 635,000 3,955 635,000 13 1 350 15,955 12,000 192,000 557,250 192,000 621,083 14 192,000 350 15,955 12,000 557,250 128,168 429,083 192,000 621,083 513,291 350 15,955 621,083 0.751 621,083 0.683 621,083 0.621 15 12,000 12,000 466,628 3 557,250 128,168 429,083 192,000 621,083 621,083 16 15,955 192,000 557,250 128,168 424,208 4 350 429,083 192,000 17 128,168 5 350 15,955 12,000 192,000 557,250 429,083 192,000 621,083 385,643 18 NPV with FC change 19 1,394,391 20 Sales Sale Variable Contributio Fixed Depreciat Depreciati Operating Total cash PVIF@ Present 10% 21 Year units price |Таx@23% cash flows Investment flows value ion РBT РАT costs cost n per unit on (960,000) 1.000 1,139,235 0.909 1,139,235 0.826 1,139,235 0.751 1,139,235 0.683 1,139,235 0.621 (960,000) 1,035,668 941,516 22 (960,000) 0 5,155 562,500 5,155 562,500 192,000 1,230,175 5,155 562,500 5,155 562,500 192,000 1,230,175 282,940 5,155 562,500 23 10,800 282,940 1 385 15,955 192,000 1,230,175 947,235 192,000 1,139,235 24 10,800 10,800 2 385 15,955 282,940 282,940 947,235 192,000 1,139,235 192,000 1,230,175 25 947,235 855,924 385 15,955 192,000 1,139,235 1,139,235 1,139,235 26 4 385 15,955 10,800 947,235 192,000 778,113 192,000 1,230,175 27 282,940 707,375 5 385 15,955 10,800 947,235 192,000 28 29 Best case NPV 3,358,596

Total cash Contribution Fixed Depreciati Operating Sales Sale Variable PVIF@ Present Depreciat cash flows Investment flows value Year units price |Таx@23% 10% РAT РBT ion cost costs per unit on (960,000) 1.000 183,010 0.909 (960,000) (960,000) 0 15,955 13,200 $ 15,955 13,200 $ 15,955 13,200$ 15,955 13,200 $ 15,955 13,200 $ (11,675) (2,685) (8,990) 1 315 2,755 687,500 192,000 192,000 183,010 166,373 183,010 0.826 183,010 0.751 151,248 192,000 (11,675) (2,685) (8,990) 192,000 2 315 2,755 687,500 183,010 2,755 (11,675) (2,685) (8,990) 3 315 687,500 192,000 192,000 183,010 137,498 183,010 0.683 183,010 0.621 2,755 (11,675) (2,685) (8,990) 192,000 4 315 687,500 192,000 183,010 124,998 192,000 (11,675) (2,685) (8,990) 113,635 5 315 2,755 687,500 192,000 183,010 (266,247) Worst case NPV NPV best $3,358,596.02 -$266,247.17 NPV worst NPV base $ 1,423,580.38 NPV falls by -$2.92

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