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?

Answer 1

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.