Please help. I\'m am struggling with this one. Thank you. You are considering a
ID: 2642153 • Letter: P
Question
Please help. I'm am struggling with this one. Thank you.
You are considering a new product launch. The project will cost $1,232,500, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 310 units per year; price per unit will be $19,300, variable cost per unit will be $15,800, and fixed costs will be $329,000 per year. The required return on the project is 13 percent, and the relevant tax rate is 35 percent.
Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within
Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within
Explanation / Answer
Unit salesWorst = 310 (1 - 0.1) = 279 units
Variable cost per unitWorst = $15,800 (1 + 0.1) = $17,380
Fixed costsWorst = $329,000 (1 + 0.1) = $361,900
OCFWorst = [($19,300 - $17,380)(279) - $361,900][1 - 0.35] + 0.35($1,232,500/5)
OCFWorst =112,975+86,275=$199,250
NPVWorst = -$1,232,500+$199,250*1-1/(1+0.13)5/0.13=$3,654,242 (Approx)