Problem: The expected annual free cash flow for the GPS tracker investment from problem 3-1 is computed as follows:
Revenues 1,250,000
Variable cost 750,000
Fixed expenses 250,000
Gross profit 250,000
Depreciation 100,000
Net operating income 150,000
Income tax expense 51,000
NOPAT 99,000
Plus: depreciation 100,000
Less: CAPEX
Less: working capital investment
Free cash flow 199,000
Question 1) Construct a spreadsheet model to compute free cash flow that relies on the following assumptions or estimates:
Base Case Estimates Values
Initial cost of equipment 1, 000,000
Project and equipment life 10 years
Salvage value of equipment 0
Working capital requirement 0
Depreciation method Straight-line
Depreciation expense 100,000
Discount rate 10.00%
Tax rate 34.00%
Unit sales 10,000
Price per unit 125.00
Variable cost per unit 75.00
Fixed costs 250,000
Question 2) What level of annual unit sales does it take for the investment to achieve a zero NPV? Use your spreadsheet model to answer this question. (Hint: Use the Goal Seek function in Excel.)
Question 3) If unit sales were 15% higher than the base case, what unit price would it take for the investment to achieve a zero NPV?