The expected annual free cash flow for the GPS tracker investment from problem 3-1 is computed as follows:
Revenues 1,250,000
Variable cost 750,000
Fixed expenses 250,000
Gross profit 250,000
Depreciation 100,000
Net operating income 150,000
Income tax expense 51,000
NOPAT 99,000
Plus: depreciation 100,000
Less: CAPEX
Less: working capital investment
Free cash flow 199,000
- Construct a spreadsheet model to compute free cash flow that relies on the following assumptions or estimates:
- What level of annual unit sales does it take for the investment to achieve a zero NPV? Use your spreadsheet model to answer this question. (Hint: Use the Goal Seek function in Excel.)
- If unit sales were 15% higher than the base case, what unit price would it take for the investment to achieve a zero NPV?