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# Financial Management: Depreciation, Variable Pricing

You are considering a new product launch. The project will cost \$1,550,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 150 units per year; price per unit will be \$19,000, variable cost per unit will be \$11,000, and fixed costs will be \$460,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 34 percent.

a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent. 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 amount should be indicated by a minus sign. Round your NPV answers to 2 decimal places. (e.g., 32.16))

Scenario Unit Sales Variable Cost Fixed Costs NPV
Base \$ \$ \$
Best
Worst

b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs. (Negative amount should be indicated by a minus sign. Round your answer to 3 decimal places. (e.g., 32.161))

ΔNPV/ΔFC \$

c. What is the cash break-even level of output for this project (ignoring taxes)? (Round your answer to 2 decimal places. (e.g., 32.16))

Cash break-even

d-1 What is the accounting break-even level of output for this project? (Round your answer to 2 decimal places. (e.g., 32.16))

Accounting break-even

d-2 What is the degree of operating leverage at the accounting break-even point? (Round your answer to 3 decimal places. (e.g., 32.161))

Degree of operating leverage

#### Solution Summary

Depreciation and variable pricing for financial management are given. The best-case and worst-case scenarios are given.

\$2.19