Question
Consider an investment project whose initial cost which is also equal to its capital cost is $30 million. The life of the project is 15
Consider an investment project whose initial cost which is also equal to its capital cost is $30 million. The life of the project is 15 years and it is estimated to have zero salvage value. Depreciation on this asset will be claimed on a declining balance basis at the d rate of 20%. The first year one-half rule will apply. The product will produce will be sold at $10,000 per unit and variable costs per unit is $6,000. Assume annual fixed cost of the project of $4 million, corporate tax rate of 30% and costs of capital at 10% per annum.
a)Find the financial break-even level of the projects output. If the forecasted incremental output of the project is 2,240 units, is the project acceptable?
Using the same data as above, but add the following information:
-The salvage value of the equipment is $6 million at the end of the 15thyear
- In addition to capital cost of $30 million, the firm has to incur also $5 million non-capital costs as part of the initial costs.
b)Redo the financial break-even analysis of the project with the same forecasted level of incremental output of 2,240 units.
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