Based on the recent success of Ontario tennis star Milos Raonic, Nike Canadawill produce new state of the art tennis racket with a red maple leaf on the strings. Mike expects to sell 10,000 rackets annually for the next 4 years. Eachracket will retail at a manufacturer'ssuggested retail price (MSRP) of $475. Up-front depreciable costs associated with this project are $800,000 and there will be no recovery of those costs at the end of the four years. Variable costs are $350 per racket and fixed costs are $300,000 per year.The project will require original net working capital of $450,000 that will be fullyrecovered in year 4. The firm operates with a 9% discount rate and a 36%marginal tax rate. The firm uses straight line depreciation over the life of theproject.
(a) Calculate the NPV of this project.
(b) With the current economic conditions, Nike is worriedabout how sales of high-end rackets will be affected. What will be the new NPV for this project if the sales price decreases by 10%, unit sales peryear decrease to 7,500 and the company's up-front costs increase to $950,000?
(c) Calculate the firm's accounting breakeven point in sales dollars for the basecase.
(d) Calculate the firm's NPV breakeven points in sales dollars for the base case.