Question

8. You
are considering a new product launch. The project will cost
$680,000, have a four-year life, and have no salvage value;
depreciation is straight-line to zero. Sales are projected at 100
units per year, price per unit will be $19,000, variable cost per
unit will be $14,000, and fixed costs will be $150,000 per year.
The required return on the project is 15%, and the relevant tax
rate is 35%. Ignore the half-year rule for accounting for
depreciation.
**(18 marks total)**

a. Calculate the following six numbers for this project. Round your answers to two decimal places.

(i) NPV

(ii) Profitability Index
(PI)
**(1 mark)**

(iii) Payback period (in
years)
**(1 mark)**

(iv) Discounted payback period (in
years)
**(1 mark)**

(v) Internal Rate of Return (IRR in %)
**
(1 mark)**

(vi) Average Accounting Return (AAR in %)

Hint: Net Income = {[(Price – variable cost)*Quantity Sold] – Fixed Costs – Depreciation} * (1 – Tax rate)

b. Evaluate the sensitivity of the NPV, PI, Payback period, Discounted payback period, AAR, and IRR to a ±10% variation in the number of units sold per year. Ensure that you interpret your answers in words.

**Hint #1:** For example,
for the NPV, increase the quantity sold by 10% and re-calculate the
NPV. Then calculate the percentage change of this new NPV over the
base case NPV from part (a). Repeat the process for a 10% decrease
in quantity sold.

**Hint #2:** You must
perform the process in Hint #1 for each of the six items in part
(a). Note that IRR and AAR are already rates of returns. You do not
have to calculate the percentage changes over the base case numbers
for IRR and AAR. Instead, simply calculate the difference between
the new numbers and the base case numbers for IRR and AAR.

**Hint #3:** It may be
easier to perform these calculations in a spreadsheet. If you opt
to do these calculations in a spreadsheet, ensure that you copy and
paste the spreadsheet into your Word
document.

Answer #1

You are considering a new product launch. The project will cost
$982,000, have a four-year life, and have no salvage value;
depreciation is straight-line to zero. Sales are projected at 300
units per year; price per unit will be $19,200, variable cost per
unit will be $15,700, and fixed costs will be $328,000 per year.
The required return on the project is 12 percent, and the relevant
tax rate is 40 percent.
Based on your experience, you think the unit...

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...

(Payback
period, NPV, PI, and IRR
calculations)
You are considering a project with an initial cash outlay of
$75,000
and expected free cash flows of
$26,000
at the end of each year for
5
years. The required rate of return for this project is
7
percent.
a. What is the project's payback period?
b. What is the project's
NPV?
c. What is the project's
PI?
d. What is the project's
IRR?

Your company is considering an
expansion into a new product line. The project cash flows are as
follows:
Year
Project A
0
-$60,000
1
44,000
2
20,000
3
14,000
The
required return for this project is 10%.
What is the NPV for the project?
What is the IRR for the project?
What...

Telesis Corp is considering a project that has the
following cash flows:
Year
Cash Flow
0
-$1,000
1
400
2
300
3
500
4
400
The company’s weighted average cost of capital (WACC) is
10%. What are the project’s payback period (Payback), internal rate
of return (IRR), net present value (NPV), and profitability index
(PI)?
A.
Payback = 3.5, IRR = 10.22%, NPV = $1260, PI=1.26
B.
Payback = 2.6, IRR = 21.22%, NPV = $349, PI=1.35
C.
Payback =...

(Payback period, NPV, PI, and IRR calculations) You are
considering a project with an initial cash outlay of $80,000 and
expected free cash flows of $26,000 at the end of each year for 6
years. The required rate of return for this project is 7
percent.
a. What is the project's payback period?
b. What is the project's NPV?
c. What is the project's PI?
d. What is the project's IRR?
a. The project's payback period is nothing years. (Round...

You are considering a project with an initial cash outlay of
$100,000 and expected free cash flows of $23,000 at the end of each
year for 6 years. The required rate of return for this project is
10 percent.
a. What is the project’s payback period?
b. What is the project’s discounted payback period?
c. What is the project’s NPV ?
d. What is the project’s PI ?
e. What is the project’s IRR ?
f. What is the project’s...

A project has an initial cost of $52,125, expected net cash
inflows of $12,000 per year for 8 years, and a cost of capital of
12%. What is the project's NPV? (Hint: Begin by constructing a time
line.)
, What is the project IRR?
What is the project's payback period?
What is the project's discounted period?

You are considering a new product. It will cost $966,000 to
launch, have a 3-year life, and no salvage value. Depreciation is
straight-line to zero. The required return is 20%, and the tax rate
is 30%. Sales are projected at 80 units per year. Price per unit
will be $40,000, variable cost per unit is $24,000 and fixed costs
are $500,000 per year. Operating cash flows have been calculated
for you as 642,600 per year.
Suppose that the sales units,...

(A)
A company is considering a major expansion of its product line. The
initial outlay would be $10,100,000 and the project would generate
cash flows of $1,290,000 per year for 20 years. The appropriate
discount rate is 10%. (a) calculate the NPV (b) calculate the PI
(c) calculate the IRR (d) should this project be excepted?
(B) The same company is considering a new system for its lot.
The system will provide annual labor savings and reduced waste
totaling $175,000...

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