Hewlett Packard is considering an investment project to make a portable printer.
ID: 2824431 • Letter: H
Question
Hewlett Packard is considering an investment project to make a portable printer. Suppose the project requires initial investment of $100,000. The company uses 14% after tax required rate of return. Fixed cash outlays are $30,000 a year. The company expects the printer will sell for $80 per unit and the variable cost to build a printer will be 25 percent of sales. The company does its analysis based on a 10-year project life. The salvage value of the project is zero and tax rate is 35%. The company uses Straight Line Depreciation Method.
What are annual cash flows needed to generate a net present value of $0?
What are annual sales volume needed to generate a net present value of $0?
What is the number of units of printer every year will generate a net present value of $0?
Explanation / Answer
Let X no of Units Sold
Equation 0=-100000+(39X-16000)*5.2161
x=901.829592 =902 units
What are annual cash flows needed to generate a net present value of $0?
=39*901.829-16000
=$19171
What are annual sales volume needed to generate a net present value of $0?
902*80=$72160
What is the number of units of printer every year will generate a net present value of $0?
902 units
Sales 80X Variable Cost .25*(80X) Depreciation 10000 Fixed Expense 30000 Profit before Tax 60X-10000-30000 Tax 35% (1-.35)*(60X-10000-30000) After Tax =39x?26000 Add Depreciation 10000 Annual Cash Flow 39X-16000 PV annuty factor 14% 5.2161 PV of Operating Cash Flow (39X-16000)*5.2161