Chapter Review and Self Test Problems

Use the following base-case information to work the self-test problems.

A project under consideration costs $750,000, has a five-year life, and has no salvage value. Depreciation is straight-line to zero. The required return is 17 percent, and the tax rate is 34 percent. Sales are projected at 500 units per year. Price per unit is $2,500, variable cost per unit is $1,500, and fixed costs are $200,000 per year.

11.1 Scenario Analysis Suppose you think that the unit sales, price, variable cost, and fixed cost projections given here are accurate to within 5 percent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best- and worst-case scenario NPVs?

11.2 Break-Even Analysis Given the base-case projections in the previous problem, what are the cash, accounting, and financial break-even sales levels for this project? Ignore taxes in answering.

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