Question

In working on a bid for project you have determined that $245,000 of fixed assets will be required and that they will be depreciated straight-line to zero over the 5-year life of the project, and you can get $23,200 for these fixed assets at the end of 5 years. You will also need to increase net working capital by 15,000 initially and recoup the investment in net working capital at the end of the project. You have also determined that the discount rate should be 14 percent and the tax rate will be 35 percent. In addition, the annual cash costs will be $68,500. What is the minimum amount of annual sales revenue that is required for you to make money on the project? PLEASE SHOW WORK

A. $151,627.90

B. $155,119.00

C. $162,515.75

D. $102,627.90

E. $227,012.50

Assume BGL Enterprises increases its operating efficiency by lowering its costs while holding its sales constant. As a result, given all else constant, the: I HAVE THE ANSWER BUT NEED AN EXPLANATION AS TO WHY THIS IS THE CORRECT ANSWER

A.        return on assets will decrease.

B.        profit margin will decline.

C.        equity multiplier will decrease.

D.        return on equity will increase.

E.        price-earnings ratio will increase.

Answer 1

1.
Let annual sales revenue be x

NPV>0 for the project to make money

NPV=-245000-15000+15000/1.14^5+23200*(1-35%)/1.14^5+((x-68500-245000/5)*(1-35%)+245000/5)/0.14*(1-1/1.14^5)

Hence,
-245000-15000+15000/1.14^5+23200*(1-35%)/1.14^5+((x-68500-245000/5)*(1-35%)+245000/5)/0.14*(1-1/1.14^5)>0

=>x>(-(-245000-15000+15000/1.14^5+23200*(1-35%)/1.14^5)*0.14/(1-1/1.14^5)-245000/5)/(1-35%)+68500+245000/5

=>x>151627.8662

Option A

2.
return on equity=asset turnover *net profit margin(or operating efficiency)*equity multiplier

As we see operating profit margin increases because of lower cost, return on equity will increase