At Macrohard, Inc. the cost of secret project X is $100,000. According to a confidential management report, the following can be expected in each of the five years of the machine's life.
Year 0 Years 1-5
Investment--------------------------------$100,000
Sales -------------------------------------------------------------------------$350,000
Variable costs@ 77% --------------------------------------------------- 269,500
Fixed costs ------------------------------------------------------------------- 30,000
Depreciation--------------------------------------------------------------------20,000
Pretax Profit--------------------------------------------------------------------30,500
Taxes @ 40%------------------------------------------------------------------12,200
After-tax Profits---------------------------------------------------------------18,300
Cash Flows ------------------------------------------------------------------- 38,300
Assume the cost of capital is 10%.
NPV = $45,187
a. What if the price of the machine turns out to be $120,000 instead of $100,000 (assume straight line depreciation)? What happens to net present value?
b. Instead, what if the economy booms and sales come in at $450,000 per year (variable costs remain at 77% of sales)? What happens to net present value?
c. Calculate the accounting break-even level of sales in dollars.
d. Calculate the break-even level of sales in units if the price per unit is $35:
e. Assume that a rival (Gill Bates, Inc.) is working on a similar project. If they can develop their product, you project that your sales estimate will be 10% lower than originally thought and that your variable costs will rise to 78.5% of sales due to higher promotional costs. Should you go ahead with the project?