Question
1.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
1.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%. What are the effects of the following changes on after-tax profits and cash flows?
a)Sales increase from $10 million to $11 million. (8 marks)
b)Variable costs increase to 60% of sales.
c)Let's say that the project will last for 10 years. The discount rate is 12%. What is the effect on project NPV of each of the changes considered in a) and b)?
d)If project NPV under the base-case scenario is $2 million, how much can fixed costs increase before NPV turns negative?
e)How much can fixed costs increase before accounting profits turn negative?
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