You are considering a new product launch. The project will cost $4,500,000, have a five-year…

You are considering a new product launch. The project will cost $4,500,000, have a five-year
life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 750
units per year; price per unit will be $16,500, variable cost per unit will be $12,000, and fixed
costs will be $850,000 per year. The required return on the project is 11 percent, and the
relevant tax rate is 25 percent. Based on your experience, you think the unit sales, variable
cost, and fixed cost projections given here are probably accurate to within ±10 percent.

1. What are the upper and lower bounds for these projections? What are NPVs for the
base-case, the best-case and worst-case scenarios? (Hint: use ±10 percent variations.
These variations will be only applicable for unite sale, variable costs, and fixed costs)
2. Check the sensitivity of NPV to the fixed cost and variable costs. Which element of
production is more sensitive? (Hint: use different fixed costs and variable costs with
your discretion).

3. What is the accounting break-even level of output for this project (ignoring taxes)?
4. What is the cash break-even level of output for this project (ignoring taxes)?
5. What is the financial break-even level of output for this project (ignoring taxes)?

6. What is the degree of operating leverage under each scenario?