Problem 1

Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit.

Required: (4 marks)

1a. What is the current annual operating income?

b. What is the present breakeven point in revenues?

Problem 2

Blue Company is considering two investment projects, each of which requires an upfront expenditure of $250,000. The cost of capital is 15%. The investments will produce the following net cash flows:

Year	Project A	Project B
1	$50,000	200,000
2	100,000	100,000
3	200,000	60,000

Required:

1. Compute NPV and Discounted Payback period of the projects (4 marks)
2. Which project should be accepted if the projects are independent? (1 mark)
3. Which project should be accepted if the projects are mutually exclusive? (1 mark)