Question

In: Accounting

Net cost of new equipment: 1,000,000 life: 10 years, no salvage value, straight line depreciation Forecasted...

Net cost of new equipment: 1,000,000

life: 10 years, no salvage value, straight line depreciation

Forecasted sales volume: 10,000 units per year

variable costs: 60 dollars per unit

fixed: 30 dollars per unit

150,000 per year

Taxes are 40% and cost of capital is 14%

Break even sales are said to be 8,333.3. Sales are expected to be 10,000 units and project is expected to generate net income of 30,000 per year. You are told it should be accepted.

Revenue at 10,000 units: 600,000$

Less: Variable costs $300,000

Fixed costs 150,000

Depreciation 100,000

Gross income 50,000

Taxes 20,000

Net income 30,000

1. Calculate the NCF and BOTH NPV and IRR at 10,000 units

2. Would you accept or reject? Why?

3. if you feel 8,333 isn't appropriate break-even quantity, what should it be?

4. What is the major issue causing the difference?

Expert Solution

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ekkarill92 answered 2 years ago

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