Consider Bloopers mining project. Suppose that by investing an additional $4,000,000 initially, Blooper could reduce variable costs to 20% of sales. Use Spreadsheet 10.1.

a. Find the incremental NPV for the increased investment. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

b. At what level of sales will accounting profits be unchanged if the firm makes the new investment? Assume the equipment receives the same straight-line depreciation treatment as in the original example. (Hint: Focus on the projects incremental effects on fixed and variable costs.) (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Enter your answer in thousands.)

c. What is the NPV break-even point in total sales if the firm invests in the new equipment? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Enter your answer in thousands.)

d. If the Blooper project operates at accounting break-even, will net present value be positive or negative?

Positive

Negative

SPREADSHEET 10.1 Financial projections for Blooper's magnoosium mine (dollar values in thousands). This table repeats the analysis in Spreadsheet 9.1 except that expenses are now broken down into variable and fixed expenses. 1 A. Inputs 2 Initial investment ($ thousands 3 Salvage value ($ thousands 4 Initial revenues ($ thousands 5 | Variable costs (% of revenues) 6 Initial fixed costs ($ thousands) 7 | Inflation rate (%) 8 | Discount rate (%) 9 | Receivables (% of sales) 10 | Inventory of next year's costs) 11 | Tax rate (% 12 13 Year 14 | B. Fixed assets 15 Investments in fixed assets 16 Sales of fixed assets 17 Cash flow from investment in fixed assets 18 19 C. Operating cash flow 20 Revenues 21 Variable expenses 22 Fixed ex 23 Depreciation 24 Pretax profit 25 Tax 26 Profit after tax 27 Operating cash flow 28 10,000 2,000 15,000 40,0% 4,000 5.0% 12.0% 16.7% 15.0% 350% 5 6 10,000 1,300 1,300 -10,000 15,00015,750 16,538 17,364 18,233 6,000 6,300 6,6156,946 7,293 4,000 4,2004,410 4,631 4,862 2.000 2,000 2,000 2,000 2,000 3,0003,250 3,513 3,788 4,078 1,050,138 1,229 1,326 1,427 1,950 2,113 2,283 2,462 2,650 3,950 4,113 4,283 4,462 4,650 29 D. Working capital 30 Working capital 31 Change in working capital 32 | Cash flow from investment in working capital | 1,500 4,075 4,279 4,493 4,7173,039 1,5002,575 0 225 | -1,679 | -3,039 225 1,6793,039 204 214 -214 -1,500 | -2,575 -204 34 E. Project valuation 36 Discount factor 37 PV of cash flow 38 Net present value -11,500 1,375 3,909 4,0694,238 6,329 4,339 1.000 0.8930.797 0.712 0.636 0.567 0.507 -11,500 1,228 3,116 2,896 2,693 3,591 2,198 4,223