Reference no: EM132707349

You are considering a new product launch. The project will have an initial cost for fixed assets of $1,150,000, a five-year life, and no salvage value; depreciation is straight-line to zero. Sales are projected at 230 units per year, price per unit will be $7,500, variable cost per unit will be $3,900, and fixed costs will be $122,000 per year. The required return is 14.5 percent and the relevant tax rate is 24 percent.

Based on your experience, you think the unit sales and price are accurate within a ±4 percent range while costs may vary by ±2 percent.

1) What is the fixed costs you would use to calculate the best-case NPV when evaluating the sensitivity of NPV to changes in the price per unit?

$124,440

a. $122,000

b. $126,880

c. $119,560

d. $117,120

2) Which variable has higher forecasting risk? Price per unit or variable cost per unit?

a. Variable cost per unit.

b. Cant be determined with given information.

c. Price per unit.