Answer A - Calculation of Breakeven Units to be sold
Let the No of Units required to be sold annually be x
Therefore ,
1. Calculation of PV of Cash Inflow Per unit
Particulars | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total |
Selling Price per unit | 45.00 | 49.50 | 54.45 | 59.90 | 65.88 | ||
Variable cost per unit | 30.00 | 31.50 | 33.08 | 34.73 | 36.47 | ||
Contribution per unit | 15.00 | 18.00 | 21.38 | 25.17 | 29.42 | ||
Tax on Income (36%) | 5.40 | 6.48 | 7.70 | 9.06 | 10.59 | ||
Net Inflow Per Unit | 9.60 | 11.52 | 13.68 | 16.11 | 18.83 | 69.73 | |
PVAF (10%,5) | 0.91 | 0.83 | 0.75 | 0.68 | 0.62 | ||
PV of Cash Inflow per unit | 8.73 | 9.52 | 10.28 | 11.00 | 11.69 | 51.22 |
2. Calculation of PV of Cash Outflow per unit -
Particulars | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total |
Cost of Machinery | 150000 | ||||||
Advertisement cost | 80000 | 80000 | 80000 | 80000 | 80000 | ||
Fixed Cost | 40000 | 40000 | 40000 | 40000 | 40000 | ||
Depreciation | 30000 | 30000 | 30000 | 30000 | 30000 | ||
Tax saving on Expenses | 54000 | 54000 | 54000 | 54000 | 54000 | ||
Net cash outflow | 150000 | 66000 | 66000 | 66000 | 66000 | 66000 | |
PVAF(10%,5) | 0.90909 | 0.82645 | 0.75131 | 0.68301 | 0.62092 | ||
PV of Cash outflow | 150000 | 60000 | 54545.45 | 49586.78 | 45078.89 | 40980.81 | 400191.9 |
Therefore
Breakeven is PV of Cash Infow = PV of Cash Outflow
X*51.22 + PVIF(10%,5) * 20000 (1-36%) = 400191
=> X*51.22 = 400191 - 7947.79
=> X = 392244/51.22
=> X = 7658 Units Annually
Answer to B -
NPV = PV of Cash Inflow - PV of Cash Outflow
Production | PV of Cash Inflow | PV of Cash outflow | NPV |
6000 | 315267.8 | 400191 | -84923.21 |
7948 | 400190.6 | 400191 | 0 |
8000 | 417707.8 | 400191 | 17516.79 |
9000 | 468927.8 | 400191 | 68736.79 |
Prepare the Graph Accordingly
help! done. He asks, "What would be the NPV of the project if annual unit sales...
The "Car Clean" company operates a car wash business. The company bought a machine 2 years ago at the price of $60,000. The life span of the machine is 6 years and the machine has no disposal value, the current market value of the machine is $20,000. The company is considering buying a new machine. The cost of the new machine is $100,000 and its life span is 4 years. The new machine has a disposal value of $20,000. The...
Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. - Initial investment of $5,600,000 in threading equipment - the project will last for 6 years. -The accounting department estimates that annual fixed costs will be $600,000 -variable costs should be $250 per ton. - depreciate initial investment straight-line to 0 over 6 years with salvage value of $450,000 -contract at selling price of $340 per ton - the engineering department estimates you will...
You are considering a project that will supply an automobile production facility with 35,000 tonnes of machine screws annually for five years. To get the project started, you will need an initial $1,500,000 investment in threading equipment. The project will last for five years. The accounting department estimates that annual fixed costs will be $300,000 and that variable costs should be $200 per tonne. The CCA rate for treading equipment is 20%. Accounting estimates a salvage value of $500,000 after...
You are considering a project that will supply an automobile production facility with 35,000 tonnes of machine screws annually for five years. To get the project started, you will need an initial investment of $1,500,000 in threading equipment. The project will last for five years. The accounting department estimates that annual fixed costs will be $300,000 and that variable costs should be $200 per tonne. The CCA rate for threading equipment is 20%. Accounting estimates a salvage value of $500,000...
Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. - Initial investment of $5,600,000 in threading equipment - the project will last for 6 years. -The accounting department estimates that annual fixed costs will be $600,000 -variable costs should be $250 per ton. - depreciate initial investment straight-line to 0 over 6 years with salvage value of $450,000 -contract at selling price of $340 per ton - the engineering department estimates you will...
Consider a project to supply Tacoma with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,600,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $600,000 and that variable costs should be $250 per ton. Further, the accounting department will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life and estimate a...
Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production with other details as follows: - Initial investment of $5,600,000 in threading equipment - the project will last for 6 years. -The accounting department estimates that annual fixed costs will be $600,000 -variable costs should be $250 per ton. - depreciate initial investment straight-line to 0 over 6 years with salvage value of $450,000 -contract at selling price of $340 per ton - the...
QUESTION 2 – SENSITIVITY ANALYSIS (25 POINTS) Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,600,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $600,000 and that variable costs should be $250 per ton. Further, the accounting department will depreciate the initial fixed asset investment straight-line to zero over...
Consider a project to supply Detroit with 27,000 tons of machine screws annually for automobile production. You will need an initial $5,300,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,275,000 and that variable costs should be $240 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates a salvage value...
P12-16 (similar to) 8 Question Help (Calculating project cash flows and NPV) The Guo Chemical Corporation is considering the purchase of a chemical analysis machine. The purchase of this machine will result in an increase in earnings before interest and taxes of $90,000 per year. The machine has a purchase price of $300,000, and it would cost an additional $8,000 after tax to install this machine correctly. In addition, to operate this machine properly, inventory must be increased by $20,000....