Question
You are currently employed at a major investment bank and are making 50,000/year (and expect to make that amount each year for the next five
You are currently employed at a major investment bank and are making 50,000/year (and expect to make that amount each year for the next five years). A friend comes to you with an idea for a project to make soundproof glass shields for cars to protect people from noise. You will have to quit your job, and the project will require an initial investment in equipment of 350,000 (which can be depreciated straight line over five years to a salvage value of 100,000).
You expect to sell 10000 units at 50/unit each year for the next five years. It will cost you 20 per unit to manufacture and other fixed costs will amount to 50,000/year. You own a house (which you are renting out right now for 14,000/year) that you think you can use for this project. (You cannot depreciate this house if you rent it, but you can claim depreciation of 10,000 a year if you take this project) In addition your tax rate is 40% and your discount rate is 10%.
a. What is the opportunity cost of using your house for this project?
b. What is the opportunity cost of having to quit your job to take this project?
c. What is the after-tax cashflow each year from this project?
d. What is the NPV of this project?
e. How many units would you have to sell to break even?
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