A project is going to cost $2.5 million for an initial investment in a machine....
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A project is going to cost $2.5 million for an initial investment in a machine. The machine will depreciate straight line to zero within the five-year project life with no salvage value. It is projected that the project will generate a sales of 500 units per year at a $4,000 unit price. The annual variable cost per unit is $60, and the fixed cost is 20,000 per year. The tax rate is 20% and the required return is 2%.
a. The sales, variable cost, price and fixed cost is accurate to be within 5%, what is the NPV under the base-case, worst-case, and best-case scenarios?
b. Assume everything else is at the base-case level. What is the sensitivity of NPV to changes in unit of sales?
c. Assume everything else is at the base-case level. What is the accounting, cash, and financial breakeven? (Note: Please do not rely on the formulas in the textbook as there is tax in this problem.)
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