The project in problem 3 will last for 10 years. The discount rate is 12%. A project

Question:

The project in problem 3 will last for 10 years. The is 12%.
A project currently generates sales of $10 million, variable costs equal to 50% of sales, and fixed costs of $2 million. The firm's tax rate is 35%. What are the effects of the following changes on after-tax profits and cash flows?
a. Sales increase from $10 million to $11 million.
b. Variable costs increase to 60% of sales.
a. What is the effect on project NPV of each of the changes considered in the problem?
b. If project NPV under the base-case scenario is $2 million, how much can fixed costs increase before NPV turns negative?
c. How much can fixed costs increase before accounting profits turn negative?
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...