Toronto Ltd. is considering a new “Flying Bus” launch. The project will cost $2,000,000 for capital spending, have a five-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 $16,000, variable cost per unit will be $10,000, and fixed costs will be $450,000 per year. The required return on the project is 15% and the tax rate is 20%. (25 points)
a. Toronto Ltd. is confident about the sales price, unit sales, variable cost, and fixed cost projections are accurate to within ±20 percent. What are the base-case, worst-case, and best-case scenarios NPV?
b. What is the sensitivity of NPV to changes in unit sales?
c. What are the accounting break-even quantity, cash break-even quantity, and financial break-even quantity (ignoring taxes)?