1.Armando Electric Scooter, Inc., staff has come up with the following estimates for the electric scooter project:

PessimisticExpectedOptimistic

Market size0.85 million1 million1.2 million

Market share0.0540.10.16

Unit price$3150$3,750$4,000

Unit variable cost$3,550$3,000$2,750

Fixed cost$5 million$3 million$1 million

Conduct sensitivity analysis.What are the principal uncertainties in the project? Assume an initial investment of $16 million to be depreciated over a period of 10 years to a salvage value of zerio.Corporate Tax rate is 20%. Assume a cost of capital of 13%.

2.

Christian and Thayres, Inc., invites bids for supply of 200,000 units of widget lids a year.You would like to bid on the contract.The plant manager believes that it would be cheaper to make these lids rather than buy them.Direct production costs are estimated to be only $1.50 a lid.The necessary machinery would cost $150,000.The investment could be written off using straight line method of depreciation to value of zero over a period of 5 years.Machine can be sold in the market at a price of $50,000 at the end of five years. There are no fixed costs. The plant manager estimates that the operation would require working capital of $30,000 but argues that this sum can be ignored since it is recoverable at the end of the 5 years.The company pays tax at a rate of 34 percent and the opportunity cost of capital is 15 percent. Determine the bid price for this contract. If Christian and Thayres do not want to pay more than $1.60 per unit, can you still supply them at that price?

3.

Theresa Athletics Inc. has purchased a $200,000 machine to produce tennis balls. The machine will be fully depreciated by the straight-line method for its economic life of five years and will be worthless after its life.The firm expects that the sales price of the toy is $35 while its variable cost is $15.The firm should also pay $325,000 as fixed costs each year.The corporate tax rate for the company is 25 percent, and the appropriate discount rate is 12 percent.

1. What is the present value of the break-even point?
2. What will be the impact of an increase in the tax rate from 25% to 34% on the breakeven point?
3. What will be the impact of a decrease in the cost of capital from 12% to 10% on the project breakeven point?