Question
BASE CASE Year 1 2 3 4 5 Number of units sold per year: 100 100 100 100 100 Unit sales price: $10,000 $10,000 $10,000
BASE CASE | Year | |||||||
1 | 2 | 3 | 4 | 5 | ||||
Number of units sold per year: | 100 | 100 | 100 | 100 | 100 | |||
Unit sales price: | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 | |||
Revenue: | $1,000,000 | $1,000,000 | $1,000,000 | $1,000,000 | $1,000,000 | |||
Variable cost per unit: | $5,000 | $5,000 | $5,000 | $5,000 | $5,000 | |||
Variable cost per year: | $500,000 | $500,000 | $500,000 | $500,000 | $500,000 | |||
Fixed Cost: | $125,000 | $125,000 | $125,000 | $125,000 | $125,000 | |||
Total operating cost per year: | $625,000 | $625,000 | $625,000 | $625,000 | $625,000 | |||
Annual Revenue - Operating cost: | $375,000 | $375,000 | $375,000 | $375,000 | $375,000 | |||
Depreciation per year: | $200,000 | $200,000 | $200,000 | $200,000 | $200,000 | |||
Tax Savings (tD) per year: | $80,000 | $80,000 | $80,000 | $80,000 | $80,000 | |||
Cash flow per year: | ($1,000,000) | $305,000 | $305,000 | $305,000 | $305,000 | $305,000 | ||
Capital Investment: | $1,000,000 | |||||||
Minimum Acceptable Rate of return: | 10.0% | |||||||
NPV= $156,190. | ||||||||
NPV = | $156,190 | (A) If the number of snowmobiles went from 100 units per year being sold in the Base Case to 150 per year, what is the new NPV at the minimum acceptable return of 10% ?
(B) Using the spreadsheet for the Base Case (number of snowmobiles sold per year is $100):
i.What is the IRR of the business ? ii.From the Base Case, how low can the number of snowmobile sales go to in order to have an NPV of zero ? This is called the breakeven point. iii.You get good news from your team ! Your marketing team forecasts that sales of the snowmobiles will be 120 per year which is better than in the Base Case. How much can you now afford to invest and still get a 10% return ? |
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