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JP Apparel is considering investing in new machinery that will generate sustainably created athleisure shirts and pants. The discount rate is 10%, and the initial investment in equipment $12.5 million. The machinery's economic life is 25 years and the equipment will be depreciated on a straight-line basis over the project's life and has no salvage value. The following financial information is estimated for production from the machinery: Sales price per shirt: $65 Sales price per pant: $115 Variable Costs per shirt: $5.75 Variable Costs per pant: $7.00 Fixed Costs of production per Year: $165,000 Tax Rate=21% Number of shirts sold per year: 4,200 Number of pants sold per year: 5,500 1. What is the accounting break-even level for production of a) shirts, and b) pants? 2. What is the financial break-even level for production of a) shirts, and b) pants? 3. What is the base-cash cash flow of this project (i.e., accounting for both shirts and pants)? 4. What is the base-case NPV of this project? 5. Assume that your projection for price of shirts, fixed costs, and variable costs of pants were only accurate within +/- 15%. Calculate the best-case and worst-case NPV figures. Do you think JP Apparel should take on this project? Why or why not? 6. What is the sensitivity of the NPV to changes in the fixed costs? Explain what your answer tells you about a $10,000 increase in projected fixed costs for pants.| JP Apparel is considering investing in new machinery that will generate sustainably created athleisure shirts and pants. The discount rate is 10%, and the initial investment in equipment $12.5 million. The machinery's economic life is 25 years and the equipment will be depreciated on a straight-line basis over the project's life and has no salvage value. The following financial information is estimated for production from the machinery: Sales price per shirt: $65 Sales price per pant: $115 Variable Costs per shirt: $5.75 Variable Costs per pant: $7.00 Fixed Costs of production per Year: $165,000 Tax Rate=21% Number of shirts sold per year: 4,200 Number of pants sold per year: 5,500 1. What is the accounting break-even level for production of a) shirts, and b) pants? 2. What is the financial break-even level for production of a) shirts, and b) pants? 3. What is the base-cash cash flow of this project (i.e., accounting for both shirts and pants)? 4. What is the base-case NPV of this project? 5. Assume that your projection for price of shirts, fixed costs, and variable costs of pants were only accurate within +/- 15%. Calculate the best-case and worst-case NPV figures. Do you think JP Apparel should take on this project? Why or why not? 6. What is the sensitivity of the NPV to changes in the fixed costs? Explain what your answer tells you about a $10,000 increase in projected fixed costs for pants.|
