Question - You are considering a new product launch. The project will cost $1,252,500, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 350 units per year; price per unit will be $19,700, variable cost per unit will be $16,200, and fixed costs will be $333,000 per year. The required return on the project is 13 percent, and the relevant tax rate is 30 percent.
Requirement 1: Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent.
(a) What are the best and worst case NPVs with these projections?
(b) What is the base-case NPV?
Requirement 2: What is the sensitivity of the NPV to changes in fixed costs?