Question

Martin Enterprises needs someone to supply it with 131,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contractIt will cost you $940,000 to install the equipment necessary to start production, you'll depreciate this cost straight line to zero over the project's lifeYou estimate that, in five years, this equipment can be salvaged for $103,000. Your fixed production costs will be $515,000 per year, and your variable production costs should be $ 17.95 per carton. You also need an initial investment in net working capital of $102,000. Assume your tax rate is 21 percent and you require a return of 12 percent on your investment

represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems. Martin Enterprises needs someone to supply it with 131,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost you $940,000 to install the equipment necessary to start production, you'll depreciate this cost straight-line to zero over the project's life. You estimate that, in five years, this equipment can be salvaged for $103,000. Your fixed production costs will be $515,000 per year, and your variable production costs should be $17.95 per carton. You also need an initial investment in net working capital of $102,000. Assume your tax rate is 21 percent and you require a return of 12 percent on your investment a. Assuming that the price per carton is $27.20, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Assuming that the price per carton is $27.20, find the quantity of cartons per year you can supply and still break even. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) C. Assuming that the price per carton is $27.20, find the highest level of fixed costs you could afford each year and still break even. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. NPV b. Break-even number of cartons c. Break-even fixed costs

Answer 1

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W ' ® v a ax 2 ENG - 10:45 18-03-2020_ • 7 X IN741 _IM I N TO IP iQ IR IS IT IU I I WA 741 742 743 744 UNITS 131000 131000 131000 131000 131000 745 SP 27.2 27.2 27.2 27.2 27.2 VC 17.95 17.95 17.95 17.95 1 17.95 3 2 -940000 - 102000 746 747 748 749 750 751 752 753 754 755 756 757 758 759 760 761 YEAR COST OF MACHINE NWC SALES VARIABLE COST FIXED COST DEPRECIATION PBT TAX @21% PAT DEPRECIATION CFAT SALVAGE VALUE RECOVERY OF NWC TERMINAL CFAT PV FACTOR @12% PV OF CF 3563200 2351450 515000 188000 508750 106837.5 401912.5 188000 589912.5 3563200 2351450 515000 188000 508750 106837.5 401912.5 188000 589912.5 3563200 2351450 515000 188000 508750 106837.5 401912.5 188000 589912.5 3563200 2351450 515000 188000 508750 106837.5 401912.5 188000 589912.5 3563200 2351450 515000 188000 508750 106837.5 401912.5 188000 589912.5 81370 (103000(1-0.21)] = SALVAGE VALUE AFTER TAX 102000 773282.5 0.567427 438781.2576 1188551.60 NPV 762 -1042000 589912.5 589912.5 589912.5 0.892857 0.797194 0.711780 -1042000 526707.589 470274.63 419888.0654 589912.5 0.635518 374900.0584 763 761 ... RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND | OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRS HAMADA ... Đ : TI

W ' ® v a ax 2 ENG - 10:45 18-03-2020_ IN787 - IN 10 IP Q R S T U V W IM 764 765 (b) 766 767 768 BREAKEVEN UNITS [(units (sp-vc) - fc-depreciation)(1-t) + depreciation] x PVIFA @ 12% 5 YEARS + (RECOVERY OF WORKING CAPITAL + AFTER TAX SALVAGE VALUE) X PVIF @12% 5 YEARS = COST OF EQUIPMENT + WORKING CAPITAL 769 {[X (27.20-17.95) -515000-188000]*0.79 + 188000 } X PVIFA @ 12% 5 YEARS + (81370+102000) X PVIF @12%, 5 YEARS = 940000 + 102000 {[X (27.20-17.95) -515000-188000]*0.79 + 188000 }X 3.604776 + (81370+102000) X 0.567427 = 940000 + 102000 {[X (7.3075) - 367370} X 3.604776 + 104049.09=1042000 X (26.3419) -1324286.5591 + 104049.09 =1042000 26.3419(x) = 2262237.4691 X = 85879.81 MINIMUM NO OF CARTONS PER YEAR TO BE SUPPLIED 85880 770 771 772 773 774 775 776 (c) 777 778 779 HIGHEST FIXED COSTS & STILL BREAK EVEN {[131000 (27.20-17.95) -FC-188000]*0.79 + 188000 } X PVIFA @ 12% 5 YEARS + (81370+102000) X PVIF @12%, 5 YEARS = 940000 + 102000 (957282.50 - 0.79(FC) -148520 + 188000) X 3.604776 + (81370 + 102000) x 0.567427=1042000 3593105.5377 -2.847773(X) + 104049.09 =1042000 2.847773(x) = 2655154.6277 X=932361.75 THE HIGHEST FIXED COST SHOULD BE = 932361.75 780 781 782 783 784 785 786 787 ܠܘܩܒ L ... RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRS HAMADA ...