Question

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done. He asks, "What would be the NPV of the project if annual unit sales vary from 400,000, 450,000, ..., 900,000 and if the unit price per bar varies from $1.20, $1.30, ..., $1.70?" Show the Data Table that answers his question. 10. (Cash-flow analysis) The "Less Is More" company manufactures swimsuits. The company is considering expanding to the bathrobe market. The proposed investment plan includes: • Purchase of a new machine: The cost of the machine is $150,000, and its expected life span is 5 years. The machine will be depreci- ated to zero salvage value, but the chief economist of the company estimates that it can be sold for $20,000 at the end of 5 years. Advertising campaign: The head of the marketing department esti- emates that the campaign will cost $80,000 annually. . Fixed costs: Incremental fixed costs of the new department will be $40,000 annually. Variable costs: First-year variable costs are estimated at $30 per bathrobe, but due to the expected increase in labor costs, they are expected to rise at 5% per year. Price per bathrobe: Each of the bathrobes will be sold at a price of $45 at the first year. The company estimates that it can raise the price of the bathrobes by 10% in each of the following years. The "Less Is More" discount rate is 10%, and the corporate tax rate is 36%. a. What is the break-even point of the bathrobe department (what is the minimal number of units it needs to sell so the expansion is profitable)? b. Plot a graph in which the NPV is the dependent variable of the annual production. 1. (Cash-flow analysis, replacing equipment) The "Car Clean" company oper- ates a car wash business. The company's current cleaning machine was bought 2 years ago at the price of $60,000. The life span of this machine is 6 years, the machine has no disposal value, and the current market value of the machine is $20,000; depreciation is on a straight-line harin is considering ronde

Answer 1

Answer A - Calculation of Breakeven Units to be sold

Let the No of Units required to be sold annually be x

Therefore ,

1. Calculation of PV of Cash Inflow Per unit

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Total
Selling Price per unit		45.00	49.50	54.45	59.90	65.88
Variable cost per unit		30.00	31.50	33.08	34.73	36.47
Contribution per unit		15.00	18.00	21.38	25.17	29.42
Tax on Income (36%)		5.40	6.48	7.70	9.06	10.59
Net Inflow Per Unit		9.60	11.52	13.68	16.11	18.83	69.73
PVAF (10%,5)		0.91	0.83	0.75	0.68	0.62
PV of Cash Inflow per unit		8.73	9.52	10.28	11.00	11.69	51.22

2. Calculation of PV of Cash Outflow per unit -

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Total
Cost of Machinery	150000
Advertisement cost		80000	80000	80000	80000	80000
Fixed Cost		40000	40000	40000	40000	40000
Depreciation		30000	30000	30000	30000	30000
Tax saving on Expenses		54000	54000	54000	54000	54000
Net cash outflow	150000	66000	66000	66000	66000	66000
PVAF(10%,5)		0.90909	0.82645	0.75131	0.68301	0.62092
PV of Cash outflow	150000	60000	54545.45	49586.78	45078.89	40980.81	400191.9

Therefore

Breakeven is PV of Cash Infow = PV of Cash Outflow

X*51.22 + PVIF(10%,5) * 20000 (1-36%) = 400191

=> X*51.22 = 400191 - 7947.79

=> X = 392244/51.22

=> X = 7658 Units Annually

Answer to B -

NPV = PV of Cash Inflow - PV of Cash Outflow

Production	PV of Cash Inflow	PV of Cash outflow	NPV
6000	315267.8	400191	-84923.21
7948	400190.6	400191	0
8000	417707.8	400191	17516.79
9000	468927.8	400191	68736.79

Prepare the Graph Accordingly