Suppose Snowmobile Inc. is considering whether or not to launch a new snowmo bile. It expects to

Question:

Suppose Snowmobile Inc. is considering whether or not to launch a new snowmo bile. It expects to sell the vehicle for $10,000 over five years at a rate of 100 per year. The variable costs of making one unit are $5,000, and the fixed costs are expected to be $125,000 per year. The investment would be $1 million and would be depreciated according to the straight-line method over five years with zero salvage value. Snowmobile Inc.'s cost of capital is 10 percent. The corporate tax rate is 40 percent. The investment would not require any significant addition to the firm's working capital requirement.

a. What is the net present value of the investment?

b. How many snowmobiles would the company need to sell to break even (i.e., for the project to have a zero net present value)?

c. At the break-even level, what would be the project's discounted payback period and internal rate of return?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...