Project analysis. You are considering a new product launch. The project will cost $1,400,000, 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 $16,000 , variable cost per unit will be $9,800, and fixed costs will be $430,000 per year. The required return on the project is 12% and the relevant tax rate is 35%.
- Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within +/- 10%. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the base-case and worst-case scenarios?
- Evaluate the sensitivity of your base case NPV to changes in fixed costs.
- What is the cash break-even level of output for this project (ignoring taxes)?
- 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?