Question

You are looking at a 5-year project to market a new direct-to-consumer genetic test which will sell for $200 and cost you $60 per test to produce.

The project will require $8 million in capital investment up front, all of which is eligible for bonus depreciation, and will have salvage value of $1 million in 5 years.

Your tax rate is 21% and the project discount rate is 15%. Assuming you sell the same number of tests each year, what is the break-even sales volume (total # of tests over all 5 years)?

1. 82,900

2. 33,400

3. 79,800

4. 35,100

5. 66,900

Answer 1

We arrive at the answer by trail and wrroe method,

When we choose option 1. (82,900 tests) meaning 82900/5 =16,580 tests, the NPV is nearly 0 as shown in the tebale its negative for all other options.

Year	0	1	2	3	4	5
initial	-8000000
Revenue for 16580 tests a year		3316000	3316000	3316000	3316000	3316000
Cost		-994800	-994800	-994800	-994800	-994800
Depreciation		-8000000
						1000000
Profit before tax		-5678800	2321200	2321200	2321200	3321200
Taxes at 21%		1192548	-487452	-487452	-487452	-697452
Profit after taxes		-4486252	1833748	1833748	1833748	2623748
Add back depreciation		8000000	0	0	0	0
Net cash flow	-8000000	3513748	1833748	1833748	1833748	2623748
NPV at 15%	? 646.89

Hence answer is 16,580 tests in a year and 82,900 tests over 5 years