Question

# Suppose you are considering an investment project that requires \$800.000, has a six-year life, and has...

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?

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

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

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.

NPW function is homogeneous degree of zero hence in worst and best case NPW should remain the same.

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