Recently Louie, my dog and the world's greatest finance hound, came to me with another flea brained scheme. He suggested that we begin to manufacture an automatic dog biscuit dispenser. To support his proposal he developed the following analysis: Net cost of new equipment $ 1,000,000 Life of new equipment 10 years No Salvage value Straight line depreciation Forecasted sales volume 10,000 units per year Expected sales price of new product $ 60 per unit Variable cost of production $ 30 per unit Fixed operating costs (excluding depreciation) $ 150,000 per year Taxes are 40% and the cost of capital is 14% Louie calculated the break-even sales to be 8,333.3 units (trust him, it is correct). He says that since sales are expected to be 10,000 units and because the project is expected to generate net income of $ 30,000 a year, it should be accepted. Revenue at 10,000 units $600,000 less: variable costs 300,000 fixed costs 150,000 depreciation 100,000 550,000 gross income 50,000 taxes 20,000 Net Income $ 30,000 Now calculate the NCF and BOTH the net present value and the internal rate of return at 10,000 units. (be careful calculating the net cash flows from the income statement, this is not a trick question)

2. Would you recommend accepting or rejecting this project? Why?
3. if you feel that 8,333 units is not the appropriate breakeven quantity, calculate what it should be?
4. If there is a different breakeven quantity, what is the major issue causing the difference?