Project Analysis and Operating Leverage for a New Product Launching Project

Question

Project Analysis and Operating Leverage

For a new product launching project, you find that the project will cost $600,000, have a five-year life with no salvage value, depreciation is straight line to zero. Sales are projected at 250 units per year and the selling price per unit will be $5,000; variable cost per unit will be $3,000 and fixed costs will be $150,000 per year. The required return on the project is 10% and the corporate tax rate is 40%.

a) What are cash, accounting and financial break-even level of output for this project, ignoring

taxes?

b) What relationship do you find among the different break-even levels of output?

c) Compare the values of payback period, NPV and IRR when a firm breaks even on i) cash basis, ii) accounting basis and iii) financial basis?

d) Using the tax shield approach to determine OCF, what is the degree of operating leverage at the projected level of sales of 250 units? How do you interpret this number?

Summary

This question belongs to finance and discusses about project analysis and operation leverage of a new product launching project.

Word count: Excel Format