Question 1 [5 pts]

Suppose the following information is available for an automotive part company to estimate the firms earnings for the next 10 years.

To build its new production line, the company is required to make a one-off investment of $44 million. It has a useful life of 10 years and a salvage value of $2 million at the end.

The estimated demand for the companys product is 10,000 units per year.

The sales price of the product will be $5,000 per unit.

The production requires 60hours of labor per unit, and the estimated labor cost is $30 per hour. It also requires various parts and supplies that will cost $1,600 per unit.

The firm expects additional operating expenses to be incurred. These are estimated to be $2 million per year.

Answer questions (a) and (b) below. (Lecture notes pp.7-12)

Calculate (i)depreciation expense per year(assume the remaining book value of existing assets is $0). Additionally, determine (ii) the production cost (i.e., cost of goods sold) per year. Do NOT present your results by multiplying annual figures by 10 years.

Answer (show the steps/calculation toward your results):

Determine EBIT per year. Do NOT present your result by multiplying annual figures by 10 years.

Answer (show the steps/calculation toward your results):