Finance Question - Capital Budgeting

The Flying Toaster Appliance Company is considering a new project. The equipment will cost $30,000, have a six-year life, and be depreciated to a zero salvage value. The tax rate is 40% and the appropriate discount rate is 12%. Fixed costs for additional salaries, utilities, and miscellaneous expenses are expected to be $20,000 per year. Variable costs for each unit are expected to be $40, and the unit price is $60. The expected sales quantity is 1,600 units per year.

(a) Compute the NPV using the information above. (8 points) (SHOW ALL WORK)

(b) Compute the financial break-even quantity, i.e., the minimum number of units required to justify investment. (SHOW YOUR WORK, AND BRIEFLY DESCRIBE HOW YOU OBTAINED THE ANSWER.) (2 points)

· financial break-even quantity =

· brief description of solution:

(c) Compute the best-case and worst-case NPV, assuming the variable cost, fixed cost (except for depreciation), and sales price can all fluctuate up or down by 10% (independent of each other). (SHOW YOUR WORK, AND BRIEFLY DESCRIBE HOW YOU OBTAINED THE ANSWER.) (4 points)

· best-case NPV = _______________

· worst-case NPV = _______________

· brief description of solution: