18 49 50 51 52 53 54 55 56 57 58 59 50 51 52 33 34 35 36 97 38 59 70 71 12 73 74 75 Capital Budgeting and Breakeven Analysis The Newport Company manufactures backpacks. The company is considering expanding to the laptop case market. The proposed investment plan includes: Annual production is fixed at 5,000 units. Each of the laptop case will be sold at a price of $45 at the first year. The company estimates that it can raise the price of the laptop cases by 10% in each of the following years. Variable costs are estimated at $30 per laptop case but due to the expected rise in labor costs they are expected to rise at 5% per year. Advertising campaign: The head of the marketing department estimates that the campaign will cost $80,000 annually. Fixed cost of the new department will be $40,000 annually Net working capital requirement is expected to be 10% of next year's total revenue. Purchase of a new machine: The cost of the machine is $150,000 and will be depreciated on a straight line basis over 6 years toward zero value. But the chief economist of the company estimates that it can be sold for $10,000 when the project terminates The project's cost of capital is 15% and the corporate tax rate is 40%. a) What is the NPV and the IRR when annual production is 5,000 units? b) What is the break-even annual production quantity for this project? B D Current Breakeven 5,000 Year 1 5,000 Year 2 5,000 Year 3 5,000 Year 4 5,000 Year 5 5.000 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 76 77 78 79 Constant Annual Production 80 81 82 Quantity sold (0) 83 Price per unit (P) 84 Unit price growth rate 85 Average variable cost (AVC) 86 Average variable cost growth rate 87 88 89 90 91 92 Revenue (PQ) 93 Variable Cost (AVC*Q) 94 Fixed Cash cost 95 Advertising 96 Other fixed cost 97 EBITDA 98 Depreciation 99 Earnings Before Interest and Taxes 100 Tax 101 Net Operating Profit After Taxes 102 Depreciation 103 Investment in Net Working Capital 104 Investment in Fixed Assets 105 Free Cash Flow (FCF) 106 107 108 Cost of Capital 109 Net Present Value 110 111 112 Projected Not Working Capital Level 113 Investment in Net Working Capital 114 115 116 Historical Cost of Fixed Assets 117 Ending Book Value 118 119 120 Salvage Value 121 Net Proceeds from Sale of Fixed Assets