A project currently generates sales of $10 million, variable costs equal to 50% of sales, and fixed
Question:
A project currently generates sales of $10 million, variable costs equal to 50% of sales, and fixed costs of $2 million. The firm's tax rate is 35%. The project will last for 10 years. The discount rate is 12%. Consider the following 2 changes.
(1) If sales increase from $10 million to $11 million.
(2) If variable costs increase to 65% of sales.
a. What is the effect on project NPV of each of the changes considered in the problem?
b. If project NPV under the base-case scenario is $2 million, how much can fixed costs increase before NPV turns negative?
c. How much can fixed costs increase before accounting profits turn negative?
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Given data Sales 1000 million Variable cost 5000 of sales Fixed cost 200 million Tax rate ...View the full answer
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Related Book For 
Fundamentals of Corporate Finance
ISBN: 978-0078034640
7th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus
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