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1) Assume that you just graduated from UNC and are employed at an investment bank making $120,000 per year, and you expect to make
1) Assume that you just graduated from UNC and are employed at an investment bank making $120,000 per year, and you expect to make the same amount for each of the next 5 years. A classmate from BUS140S, vio knous what a hard party boy you were, gives you a call and tries to convince you to join forces with him on a project The project is to produce a new type of vodka: "Hangover's over" , that won't make one feel hangover the next morning no matter how many bottles one drinks. If you decide to join, you will have to quit your current job, and work full time on the project The project requires an initial investment of $400,000 in production equipment, which can be depreciated straight-line over 5 years to a salvage value of SSO,OOO_ You ovm a house that you're currently renting out for S24,000 a year and you're planning to use the house as Inur office if you join the project. You expect to sell 20,000 bottles of the "Hangover' s over!" at S40 per unit each year for the next years. The production cost is $15 per unit, and fixed costs associated with the project are estimated to amount Sl 50,000 per year. Assume that your tax rate is 40% and your discount rate for projects with similar risk IS 12%. a. Should you accept the project? b. How many units would you have to sell each year to financially break-even? (Hint: In class, we assumed that there are no taxes v.llen solving for break-even units; but there are taxes here, so you should be careful!)
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