Question

Hewlett Packard is considering an investment project to make a portable printer. Suppose the project requires...

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?

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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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