Question

Imaging you want to invest in a project with a lifetime of 5 years. The revenue of this project comes from selling products. Initiating the project requires $100,000 investment on non-depreciable assets with no salvage value. The operating cost is estimated as $50,000 in the first year (at the end of the interval). You expect to produce and sell 1000 units of products per year (consider the revenue at the end of intervals). Operating cost and products unit price will increase at the rate of average inflation which is estimated to be 5% over the lifetime of the project.

If the tax rate is 30%, what is the minimum price of the product (in constant dollar) that makes the project acceptable at the market interest rate of 15%?

(Report your answer in dollar amounts without any extra character. Answers such as 2Million; 2M; 2,000,000 or $2000000 are not acceptable)

Answer 1

Please refer to the below table for the calculations. The per unit price of the product should be 89.1 in Year 1 and prices will increase by 5% year over year.

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
No. of Units sold		1000	1000	1000	1000	1000
Unit Price		89.1	93.5	98.2	103.1	108.3
Investment	-100000
Revenues		89089	93544	98221	103132	108289
Operating Cost		50000	52500	55125	57881	60775
Operating Margin	0	39089	41044	43096	45251	47513
Tax @30%	0	11727	12313	12929	13575	14254
After Tax Operating Margin	0	27363	28731	30167	31676	33259
Add: Depreciation	0	0	0	0	0	0
Less: Capex	-100000
Cash Flows	-100000	27363	28731	30167	31676	33259
Required Rate of Return	15%
NPV	0

The above price is applicable at NPV = 0. This is the minimum price that should be kept per unit of product in order to go ahead with the project. Any prices above 89.10 will generate higher returns above 15% for the project.