A company is considering a new product launch. The project will cost $1,500,000, have a 5-year life, and have no salvage value; depreciation is...
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A company is considering a new product launch. The project will cost $1,500,000, have a 5-year

life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 250

units per year; price per unit will be $25,000, variable cost per unit will be $16,000, and fixed

costs will be $400,000 per year. The required return on the project is 14%, and the relevant tax

rate is 35%.

(A) Based on your experience, you think the unit sales, variable cost, and fixed cost projections

given here are probably accurate to within ±10%. Make a scenario by reviewing the base,

worst and best cases for these projections, evaluate the respective NPV of each scenario.

(11 marks)

(B) Using the base case as a reference, evaluate the sensitivity of the

(i) base case NPV to changes in fixed costs assuming it is now $440,000. (7 marks)

(ii) base case NPV to changes in variable costs assuming it is now $18,000. (7 marks)

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