Question

Obtai company in Osaka, Japan is considering the introduction of an electrically powerd motor scooter for city use.

Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of 15 billion. The cost of capital is 10%. The initial investment can be depreciated on a straight-line basis over the 10-year life of the project. Profits are taxed at a rate of 50%. Consider the following project estimates: 1.0 million .1 375,000 300.000 3 billion Market size Market share Unit price Unit variable cost Fixed cost Otobal is considering still another production method for its electric scooter. It would require an additional investment of 15 billion but would reduce variable costs by V40,000 per unit. a. What is the NPV of this alternative scheme? (Do not round intermediate calculations. Enter your answer in billions rounded to 3 decimal places.) NPV billion b. What is the break-even quantity? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Break-even quantity c. Now go back to the original project shown in the problem table prior to the additional investment. Suppose Otobal's management would like to know the figure for variable cost per unit at which the original electric scooter project would break even. Calculate the level of variable costs at which the project would earn zero profit and at which it would have zero NPV. (Do not round intermediate calculations. Enter your answers in dollars per unit rounded to the nearest whole number.) Zero profit Zero NPV d. Calculate DOL based on the alternative scheme used in part a. (Do not round intermediate calculations. Round your answer to 2 decimal places.) DOL

Answer 1

Part (a)

NPV = Yen 5.331 billion, please enter 5.331 in the answer box.

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The last row highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials (except the last trow) are in Yen.

Alternative Investment:

Parameter	Linkage	Value
Volume	A = 0.1 x 1 million	100,000
Sale Price	B	375,000
Unit variable cost	C = 300,000 - 40,000	260,000
Investment	D = 15 billion + 15 billion	30,000,000,000
Life	M	10
Discount rate	R	10%
Revenue	E = A x B	37,500,000,000
Variable cost	F = C x A	26,000,000,000
Fixed cost	G	3,000,000,000
Depreciation	H = D / 10	3,000,000,000
EBIT	I = E - (F + G + H)	5,500,000,000
Tax rate	J	50%
NOPAT	K = I x (1 - J)	2,750,000,000
Operating cash flows	L = K + H	5,750,000,000
NPV	N = PV(R, M, -L, 0) - D	5,331,260,858
NPV in Yen billion	N / 10^9	5.331

Part (b)

Let Q be the break even quantity.

Hence, (SP - Unit variable cost) x Q - Depreciation - Fixed cost = 0

Hence, (375,000 - 260,000) x Q -  3,000,000,000 -  3,000,000,000 = 0

Hence, break even quantity, Q = 6,000,000,000 / (375,000 - 260,000) = 52,174

Please enter 52,174 in the answer box

Part (c)

Original investment. Let VC be the unit variable cost leading to zero profit for original investment option. Depreciation = 15,000,000,000 / 10 = 1,500,000,000

Hence,

(SP - Unit variable cost) x Q - Depreciation - Fixed cost = 0

Hence, (375,000 - VC) x 100,000 - 1,500,000,000 -  3,000,000,000 = 0

Hence, variable cost for zero profit = 375,000 - 4,500,000,000 / 100,000 =  330,000

Hence, please enter  330,000 in the first answer box of part (c)

We will have to do a goal seek for zero NPV. Set up the model and run goal seek, please see the screenshot.

AB AF AD Goal Seek AE ? X AC Value 100,000 375,000 300,000 15,000,000,000 L Set cell: SAC$298 To value: 0 By changing cell: $AC$284 10 R 10% OK | Cancel AA 281 Parameter Linkage 282 Volume 283 Sale Price 284 Unit variable cost 285 Investment D = 15 billion 286 Life 287 Discount rate 288 289 Revenue E = AXB 290 Variable cost F = CXA 291 Fixed cost 292 Depreciation H=D / 10 293 EBIT I = E - (F+G+ H) 294 Tax rate 295 NOPAT K= 1 x (1 - J) 296 Operating cash flows L= K+H 297 298 NPV N = PV(R, M, L, O) -D 299 300 NPV in Yen billion N/ 1019 37,500,000,000 30,000,000,000 3,000,000,000 1,500,000,000 3,000,000,000 50% 1,500,000,000 3,000,000,000 3,433,701,317 3.434

And the solution is:  311,176

Hence, please enter 311,176 as answer in the second box of part (c)

Part (d)

Q(P-VC) DOL = Q(P – VC) - FC S-TVC DOL= S-TVC – FC

Hence, DOL = [100,000 x (375,000 - 260,000)] / [100,000 x (375,000 - 260,000) - 3,000,000,000)] = 1.35

Please enter 1.35 in the answer box