A three -year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the three-year life. The price per unit sold is $20 and the variable cost per unit sold is $10. Fixed costs are $30,000 per year.
a. If you expect to sell 7000 units per year, what is the OCF in year 2 assuming a required return of 15% and a tax rate of 30%
b. You now find that a salvage company will pay you $10,000 for the assets at the end of year 3. The project will require an investment of $10,000 up front for net working capital. If you expect to sell 7000 units per year, compute the NPV. Assume a required return of 15% and a tax rate of 30%.
c. Disregard information in b. You now expect the number of units sold to be 7000 with an upper bound of 8000 and a lower bound of 6000 and you expect the variable cost per unit to be $10 per unit with an upper bound of $12.50 and a lower bound of $7.50. Assuming a tax rate of 30%, compute the IRR for the best case. Assume that salvage is $0 and NWC is $0. Compute the cash break-even point.
Compute DOL if quantity sold is 7000.