Problem 6-1GBK, Inc. is considering a new product. The proposal is as follows:Project cost: $2,000,000Project life: 5 yrsSalvage value: zeroDepreciation: straight line to zeroSales projection: 180 units per yearPrice per unit: $20,000Variable cost per unit will be: $12,400Fixed costs per year: $490,000Required return on the project: 10%Relevant tax rate: 35%Based on our past experience, the unit sales, variable costs and fixed cost projectionsare probably accurate to within plus or minus 10%A] What are the upper and lower bounds for these projections?B] What is the base case NPV?C] What are the best case NPV and the worst case NPV scenarios?D] Evaluate the sensitivity of your base-case NPV to changes in fixed costs.E] What is the cash break-even level of output for this project (ignoring taxes)?F] What is the accounting break-even level of output for this project? What is the degreeof operating leverage at the accounting break-even point? How do you interpret thisnumber?Problem 6-2You purchased one GBK, Inc. 6 percent coupon bond one year ago for $1,020. Thebond makes annual payments and matures four years from now. You sell the bondtoday when the required return is 5 percent. The inflation rate was 2.8 percent over thepast year. What was the real return on your investment?
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