Suppose you are considering an investment project that requires $800.000, has a
ID: 1146721 • Letter: S
Question
Suppose you are considering an investment project that requires $800.000, has a six-year life, and has a salvage value of $100,000. Sales volume is projected to be 65,000 units per year. Price per unit is $63, variable cost per unit is $42, and fixed costs are $532,000 per year. The depreciation method is a five-year SL and assume MARR 10%. (a) Determine the break-even sales volume. (b) Calculate the cash flows of the base case over six years and its NPW. (c) lf the sales price per unit increases to $400, what is the required break-even volume? (d) Suppose the projections given for price, sales volume, variable costs, and fixed costs are all accurate to within ± 15%. What would be the NPW figures of the best-case and worst-case scenarios?
Explanation / Answer
Investment =$800000
Profit =(P-VC)×65000-532000=(63-42)×65000-532000
=21×65000-532000=1365000-532000=833000
Break even volume =X
800000=X*4.36
X=313,414
Answer for B)
Cash follows over 6 years
833000/(1.1)+833000/(1.1)^2+833000/(1.1)^3+833000/(1.1)^4+833000/(1.1)^5+833000/(1.1)^6=833000×4.36=3627931
Answer for c)
If sales Price increase to $400
Then Profit each year will be
Profit per unit is ($400-$42) $358
1365000=$358*X(4.3552)
X=876 units to be produced.
Answer for D)
NPW function is homogeneous degree of zero hence in worst and best case NPW should remain the same.