Capital budgeting and sensitivity analysis You work for an automobile com pany that is considering developing a
Question:
Capital budgeting and sensitivity analysis You work for an automobile com¬
pany that is considering developing a new car. The product development costs for this new car will be $500 million per year for three years. During the third year of product development, the company will incur $1 billion for manufactur¬ ing setup costs. Three years after the start of product development, the company will begin making and selling cars. Production and sales will last seven years, and each car sold will generate an incremental profit of $2500. After seven years, the salvage value associated with the manufacturing facilities will be $200 million. The company's cost of capital is 12%.
REQUIRED
(a) What is the minimum number of cars the company must sell during each of the seven years of the product's life to make this investment desirable under the net present value criterion?
(b) What will the minimum number of vehicles be if the company's cost of capi¬ tal is 15%? (Ignore taxes when answering this question.)
(LO 1)
Step by Step Answer:
Management Accounting
ISBN: 9780130101952
3rd Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, S. Mark Young, Rajiv D. Banker, Pajiv D. Banker