Question

Problem 10-38 Financial Break-Even Analysis (L02] To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price 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 135,000 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 $960,000 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 $115,000. Your fixed production costs will be $535,000 per year, and your variable production costs should be $18.35 per carton. You also need an initial investment in net working capital of $110,000. Assume your tax rate is 25 percent and you require a return of 10 percent on your investment. a. Assuming that the price per carton is $28.00, 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 $28.00, 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 $28.00, 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.) b. Bra NPV Break-even number of cartons Break-even fixed costs c.

Answer 1

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2 v * = 11:37 ENG 18-03-2020 321 " X IP784 IM IN 10 IP Q R S T U V W 784 785 786 787 788 UNITS 135000 135000 SP 28 28 789 790 791 135000 28 18.35 1 135000 28 18.35 2 135000 28 18.35 3 VC 18.35 18.35 -960000 -110000 794 795 796 797 798 YEAR COST OF MACHINE NWC SALES VARIABLE COST FIXED COST DEPRECIATION PBT TAX @25% PAT DEPRECIATION CFAT SALVAGE VALUE RECOVERY OF NWC TERMINAL CFAT PV FACTOR @10% PV OF CF ... RELEVANT MI-np-ir NPV 3780000 2477250 535000 192000 575750 143937.5 431812.5 192000 623812.5 3780000 2477250 535000 192000 575750 143937.5 431812.5 192000 623812.5 3780000 2477250 535000 192000 575750 143937.5 431812.5 192000 623812.5 799 800 801 3780000 3780000 2477250 2477250 535000 535000 192000 192000 575750 575750 143937.5 143937.5 431812.5 431812.5 192000 192000 623812.5 623812.5 86250 (115000(1-0.25)] = SALVAGE VALUE AFTER TAX 110000 623812.5 820062.5 0.683013 0.620921 426072.3311 509194.2925 1416595.98 NPV STEIN indiffEPS EBIT LEASE SLM | GOLF IRR MACRS HAMADA ... I 802 803 804 805 806 807 -1070000 623812.5 623812.5 623812.5 1 0.909091 0.826446 0.751315 -1070000 567102.273 515547.52 468679.5642 BETA LEVERED REPLACEMENT BOND OPTION TO WAIT non

vu 11:37 Jx - ENG, ENG 18-03-2020 " 21 | X - X Fax IN O P Q R S T U V W 10826 IM 808 809 (b) 810 811 BREAKEVEN UNITS [(units (sp-vc) - fc-depreciation)(1-t) + depreciation] x PVIFA @ 10% 5 YEARS + (RECOVERY OF WORKING CAPITAL + AFTER TAX SALVAGE VALUE) X PVIF @10% 5 YEARS = COST OF EQUIPMENT + WORKING CAPITAL 812 813 814 815 816 817 818 819 820 (C) 821 {[X (28-18.35) -535000-192000] *0.75 + 192000 }X PVIFA @ 10% 5 YEARS + (86250+110000) X PVIF @10%, 5 YEARS = 960000 + 110000 {[X (28-18.35)-535000-192000]*0.75 + 192000 }X 3.7907868 + (86250+110000) X 0.6209213 = 1070000 {[X (7.2375) - 353250} X 3.7907868 + 121855.805151070000 *3.7907868 X (27.4358) - 1339095.4371 + 121855.8051 =1070000 0.6209213 27.4358(x) = 2287239.632 X = 83366.97 MINIMUM NO OF CARTONS PER YEAR TO BE SUPPLIED 83367 822 823 HIGHEST FIXED COSTS & STILL BREAK EVEN {[135000 (28-18.35) -FC-192000]*0.75 + 192000 } X PVIFA @ 10% 5 YEARS + (86250+110000) X PVIF @10%, 5 YEARS = 960000 + 110000 (977062.5 -0.75(FC) -144000 + 192000) X 3.7907868 + (86250 + 110000) X 0.6209213=1070000 3885793.3942-2.8430901(X) + 121855.8051 =1070000 2.8430901(x)=2937649.1993 X=1033259.2693 THE HIGHEST FIXED COST SHOULD BE = 1033259.27 828 829 830 831 ... RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRS HAMADA ... ►