*** Could you please help me check if there are correct. If not could you please correct me with a simple explanation.**

I feel that E's free cashflow is inconsistent with the free cashflow C's was calculated.

6.1 You and your friends are thinking about starting a motorcycle company named Apple Valley Choppers. Your initial investment would be $500,000 for depreciable equipment, which should last 5 years, and your tax rate would be 40%. You could sell a chopper for $10,000, assuming your average variable cost per chopper is $3000, and assuming fixed costs, such as rent, utilities and salaries, would be $200,000 per year.

A. Accounting breakeven: How many choppers would you have to sell to break even, ignoring the costs of financing?

Using Tax of 40% would give the same answer of 28.5714 because tax affects the whole equation. For example

0 = 0.6(((10,000-3,000)q)-20,000))

0 = 4,200q - 120,000

120,000/4,200 = q

Q = 28.9714

Breakeven units = 29 units

B. Financial breakeven: How many choppers would you have to sell to break even, if you required a 15% return? (Hint: Use the 15% as the discount rate and calculate net present value. In Excel, you may want to use the Goal Seek command, or simply use trial and error to find the correct amount.)

Net income = EBIT x (1-Interest rate)*(1-tax rate) - preferred dividends

Since theres no dividends then we assume preferred dividends are = 0

Then we can use NPV formula.

(29*10,000)/(1+15%)^1

=$252,173.71

Number of Choppers to B.E = $252,173.71 / 10,000 = 25 units

C. Assuming you could sell 60 choppers per year, what would be your IRR?

IRR is the discount rate at the when NPV is 0

(NPV0) = Initial Capital + (CF / (1+IRR)^5)

0 = 500,000-[229200/(1+IRR)^5]

IRR = 36%

Question D

A chopper would cost

= 301,703.58/60

= $5,028.39

Explanation

Initial Capital$500,000

Cash Flows (60*10,000)600,000

Less Variable Cost (60*3,000)18,000

Less Fixed cost200,000

EBIT382,000

Income tax (40%*382,000)152,800

Free Cash Flows (EBIT)229,200

The company would make FCF of $229,200 per year

In five years = 229,000*5 = $1,146,000

0(NPV) = Initial Capital + (CF / (1+IRR)^5)

Initial Capital = $500,000

0 = 500,000-[229200/(1+IRR)^5]

IRR = 36%

D. Assuming you could sell 60 choppers per year, what would your selling price have to be to generate a net present value of $150,000 at a 15% discount rate?

We nee to reverse NPV to get the actual Cash Flow

= 150,000*(1+15%)^5

=$301,703.58

Selling Price Per Unit = $301,703.58 / 60 = $5,028.39

There each Chopper would have to be sold at $5,028.39 to reach a NPV of $150,000

E. If you could sell 60 choppers in the first year, and your sales volume increased by 5% each year until the end of year 5, what would the net present value be at a 15% discount rate?

Need to find the PV (ordinary annuity) for amount of choppers sold for 5 years at an

increase rate of 5% a year.

Number of choppers sold in the first year*[1-(1+r)^-n]/r

PVchoppers = [60*[1-(1+5%)^-5]]/5%

PVchoppers = 332 Choppers

Total Cash Flows = 332*10,000 = $3,320,000

Free Cash Flows = 3,320,000 - 500,000

=2,820,000/(1+15%)^5

=$1,402,038.39