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Problem 6-1 GBK, Inc. is considering a new product. The proposal is as follows: Project cost: $2,000,000 Project life: 5 yrs Salvage value: zero...

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Problem 6-1 GBK, Inc. is considering a new product. The proposal is as follows: Project cost: $2,000,000 Project life: 5 yrs Salvage value: zero Depreciation: straight line to zero Sales projection: 180 units per year Price per unit: $20,000 Variable cost per unit will be: $12,400 Fixed costs per year: $490,000 Required return on the project: 10% Relevant tax rate: 35% Based on our past experience, the unit sales, variable costs and fixed cost projections are probably accurate to within plus or minus 10% A] What are the upper and lower bounds for these projections? B] What is the base case NPV? C] What are the best case NPV and the worst case NPV scenarios? D] Evaluate the sensitivity of your base-case NPV to changes in fixed costs. E] What is the cash break-even level of output for this project (ignoring taxes)? F] 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? Problem 6-2 You purchased one GBK, Inc. 6 percent coupon bond one year ago for $1,020. The bond makes annual payments and matures four years from now. You sell the bond today when the required return is 5 percent. The inflation rate was 2.8 percent over the past year. What was the real return on your investment?
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8737030.xlsx

Problem 6-1 Req A] Normal
Unit sales
Variable cost per unit
Fixed cost Req B] Upper
bound + 10%
180
198
$12,400
$13,640
$490,000
$539,000 Scenario Base
Case Unit sales
Variable cost
Fixed cost...

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