1. A project requires an investment of $1,000,000. Although sales will begin in the first year, operations will not achieve full scale until Year 2. After that, growth is expected to be strong. The product is expected to sell for $100 per unit. Variable costs per unit are $60. Allocable fixed costs are $300,000 per year. Projected units produced and sold per year are:
Year Units
0 NA
1 5,000
2 10,000
3 12,000
4 14,000
5 16,000
At the end of Year 5, the value of the project as an ongoing concern will be 2.5x net operating profit (assume positive cash flow = net operating profit throughout the projection)
1. At what quantity is breakeven achieved?
2. During which year is that achieved?
3. Using an average of 13,000 units sold after Year 1, and incorporating the year 1 loss as an investment, how many years after year 1 will it take to achieve payback?
4. The company uses a required rate of 12%; it also assigns an ongoing value of 2.5 times year 5 net operating profit to the project. What is the NPV for the five year projection?
5. Based on your answers to 1-4, would you recommend that the company proceed with the project?
1. A project requires an investment of $1,000,000. Although sales will begin in the first year, operations will not achieve full scale until Year 2. After that, growth is expected to be strong. The product is expected to sell for $100 per unit. Variable costs per unit are $60. Allocable fixed costs are $300,000 per year. Projected units produced and sold per year are:
Year Units
0 NA
1 5,000
2 10,000
3 12,000
4 14,000
5 16,000
At the end of Year 5, the value of the project as an ongoing concern will be 2.5x net operating profit (assume positive cash flow = net operating profit throughout the projection)
1. At what quantity is breakeven achieved?
2. During which year is that achieved?
3. Using an average of 13,000 units sold after Year 1, and incorporating the year 1 loss as an investment, how many years after year 1 will it take to achieve payback?
4. The company uses a required rate of 12%; it also assigns an ongoing value of 2.5 times year 5 net operating profit to the project. What is the NPV for the five year projection?
5. Based on your answers to 1-4, would you recommend that the company proceed with the project?
Related questions
| You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $420 per unit and sales volume to be 1,000 units in year 1; 1,500 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $235 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $171,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $37,000. NWC requirements at the beginning of each year will be approximately 30 percent of the projected sales during the coming year. The tax rate is 30 percent and the required return on the project is 12 percent. |
| What is the operating cash flow for the project in year 2? |
| Operating cash flow | $ |
