Question: The "Less Is More" company manufactures swimsuits. The company is considering expanding to the bath robes market. The proposed investment plan includes:
• Purchase of a new machine: The cost of the machine is $150,000 and its expected life span is 5 years. The terminal value of the machine is 0, but the chief economist of the company estimates that it can be sold for $10,000.
• Advertising campaign: The head of the marketing department estimates that the campaign will cost $80,000 annually.
• Fixed cost of the new department will be $40,000 annually.
• Variable costs are estimated at $30 per bathrobe but due to the expected rise in labor costs they are expected to rise at 5% per year.
• Each of the bathrobes will be sold at a price of $45 at the first year. The company estimates that it can raise the price of the bathrobes by 10% in each of the following years.
The "Less Is More" discount rate is 10% and the corporate tax rate is 36%.
a) What is the break-even point of the bathrobe department?
b) Plot a graph in which the NPV is the dependent variable of the annual production.