Assignment: You and your friends are thinking about starting a motorcycle company named Apple Valley Choppers. Your initial investment would be $500,000 for depreciable equipment, which should last 5 years, and your tax rate would be 40%. You could sell a chopper for $10,000, assuming your average variable cost per chopper is $3000, and assuming fixed costs, such as rent, utilities and salaries, would be $200,000 per year.
1) Accounting breakeven: How many choppers would you have to sell to break even, ignoring the costs of financing?
2) Financial breakeven: How many choppers would you have to sell to break even, if you required a 15% return? (Hint: Use the 15% as the discount rate and calculate net present value. In Excel, you may want to use the Goal Seek command, or simply use trial and error to find the correct amount.)
3) Assuming you could sell 60 choppers per year, what would be your IRR?
4) Assuming you could sell 60 choppers per year, what would your selling price have to be to generate a net present value of $150,000 at a 15% discount rate?
5) If you could sell 60 choppers in the first year, and your sales volume increased by 5% each year until the end of year 5, what would the net present value be at a 15% discount rate?
6) If you need to invest working capital equal to 10% of the next (coming) year's sales revenue, what would be the effect on the net present value of the project? Do you think that working capital investments always reduce the net present value of projects? (Assume a 15% discount rate, and sales volume increases by 5% each year.)