Problem $6-35$ Financial Break$-$Even Analysis

$9\mathrm{.}09$

points

The technique for calculating a bid price can be extended to many other types of

problems. Answer the following questions using the same technique as setting a bid

price; that is$,$ set the project NPV to zero and solve for the varlable in question. Martin

Enterprises needs someone to supply it with $146,000$ cartons of machine screws per

year to support its manufacturing needs over the next five years, and you've decided to

bid on the contract. It will cost $$1,860,000$ to Install the equipment necessary to start

production; you'll depreclate this cost straight$-$IIne to zero over the project's Iffe. You

estimate that, In five years, this equipment can be salvaged for $$156,000.$ Your fixed

production costs will be $$271,000$ per year, and your varlable production costs should be

$$10\mathrm{.}00$ per carton. You also need an InItlal Investment In net working capital of $$136,000.$

The tax rate is $21$ percent and you require a return of $12$ percent on your investment.

Assume that the price per carton is $$16\mathrm{.}60.$

a$.$ Calculate the project NPV$.($Do not round Intermedlate calculations and round your

answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

b$.$ What is the minimum number of cartons per year that can be supplied and still break

even? $($Do not round Intermedlate calculatlons and round your answer to the

nearest whole number, e$.$g$.,32.)$

c$.$ What are the highest fixed costs that could be incurred and still break even? $($Do not

round Intermedlate calculations and round your answer to $2$ decimal places, e$.$g$.,$

$32\mathrm{.}16.)$