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?

Answer #1

Let X no of Units Sold

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 |

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?

=39X-16000 |

=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

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