Otobai is considering still another production method for its electric scooter (see Section 10-2). It would require an additional investment of ¥15 billion but would reduce variable costs by ¥40,000 per unit. Other assumptions follow Table 10.1 .

a. What is the NPV of this alternative scheme?

b. Draw break-even charts for this alternative scheme along the lines of Figure 10.1 .

c. Explain how you would interpret the break-even figure.

d. Now suppose Otobai’s management would like to know the figure for variable cost per unit at which the electric scooter project in Section 10.1 would break even. Calculate the level of costs at which the project would earn zero profit and at which it would have zero NPV. Assume that the initial investment is ¥15 billion.

e. Recalculate DOL.

Visit us at www.mhhe.com/bma Visit us at www.mhhe.com/bma 264 Part Three Best Practices in Capital Budgeting AppendixLO1