You Are Considering a New Product Launch $\pm$ 9 Percent What Is the Worst Case NPV?
A)$3,417,907
B)$2,654,241
C)$888,618

question 16

Multiple Choice

You are considering a new product launch. The project will cost $630,000, have a 5-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per year, price per unit will be $24,000, variable cost per unit will be $12,000, and fixed costs will be $283,000 per year. The required return is 11 percent and the relevant tax rate is 34 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within $\pm$ 9 percent. What is the worst case NPV?

• A)$3,417,907
• B)$2,654,241
• C)$888,618
• D)$3,102,134
• E)$3,458,020

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Definitions:

Margin of Safety

Margin of Safety represents the difference between actual sales and break-even sales, indicating the amount by which sales can decrease before a business incurs a loss.

Break-Even Point

The point at which total costs equal total revenues, indicating that a business is not making a profit but also not incurring a loss.

Variable Cost

Costs that vary in direct proportion to changes in a business’s level of activity or volume of output produced, such as materials and labor.

Differential Cost

The difference in cost between two alternative decisions or scenarios.