What is the $500,000 added to the total annual operating cost?

What is the purpose of multiplying the tax rate 35% to the net income?

How do you get the PV = $3, 343, 317 as indicated in the attached file.

Sound Wired Corporation is considering an investment of $1,000,000 in equipment for producing a new type of compact disc. The equipment has an expected life of five years. Sales are expected to be 150,000 units per year at a price of $25 per unit. Fixed costs excluding depreciation of the equipment are $300,000 per year, and variable costs are $13 per unit. The equipment will be depreciated over five years using the straight-line method with a zero salvage value. Working capital requirements are assumed to be 1/12 of annual sales. The market capitalization rate for the project is 17% per year, and the corporation pays income tax at the rate of 35%. What is the project's NPV? What is the break-even volume? Answer: Sales revenue = $25 per unit x 150,000 units per year = $3,750,000 per year Investment in NWC = 1/12 x $3,750,000 = $312,500 Total investment = $1,000,000 + $312,500 = $1,312,500 Depreciation = $1,000,000 /5 = $200,000 per year Total annual operating costs = $13 x 150,000 + $500,000 = $2,450,000 per year CF = net income + depreciation = (1 - 0.35)(3,750,000 - $2, 450,000) + $200,000 = $1,045,000 per year NPV = PV - Initial Outlay = $3,343,317 - $1,312,500 = $2,030,817 To determine break-even volume: In order for NPV to be 0, what must the cash flow from operations be? N I PV FV PMI 5 17% -1,312,500 312,500 PMT = $365,689 Cash Flow = Net profit + Depreciation $365,689 = 0.65 (120 500,000) + 200,000 $365,689 = 7.80 325,000 + 200,000 $365,689 =7.80 125,000 $490,000 = 7.80 62,909 = 0 So the break-even volume is 62,909. 6-22