Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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You are considering a new product launch. The project will cost $1,750,000, have a 4-year life, and have no salvage value; depreciation
is straight-line to 0. Sales are projected at 220 units per year; price per unit will be $20,000; variable cost per unit will be $13,000; and
fixed costs will be $500,000 per year. The required return on the project is 15%, 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%. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and
worst-case scenarios? (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round the
final NPV answers to 2 decimal places. Omit $ sign in your response.)
Scenario
Base
Best
Worst
Unit Sales
220
242
198
> > >
Variable Cost
$13,000
Fixed Costs
$ 500,000
NPV
$ 617,133.94
$ 11,700
$ 450,000
$ 2,477,694.78 x
$ 14,300
$ 550,000
-973,974.06
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Transcribed Image Text:You are considering a new product launch. The project will cost $1,750,000, have a 4-year life, and have no salvage value; depreciation is straight-line to 0. Sales are projected at 220 units per year; price per unit will be $20,000; variable cost per unit will be $13,000; and fixed costs will be $500,000 per year. The required return on the project is 15%, 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%. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios? (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round the final NPV answers to 2 decimal places. Omit $ sign in your response.) Scenario Base Best Worst Unit Sales 220 242 198 > > > Variable Cost $13,000 Fixed Costs $ 500,000 NPV $ 617,133.94 $ 11,700 $ 450,000 $ 2,477,694.78 x $ 14,300 $ 550,000 -973,974.06
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