Question

Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of ¥20 billion. The cost of capital is 16%. The initial investment can be depreciated on a straight-line basis over the 10-year life of the project. Profits are taxed at a rate of 50%.

Consider the following project estimates:

Market size	1.5 million
Market share		.1
Unit price	¥	460,000
Unit variable cost	¥	385,000
Fixed cost	¥	3.1 billion

Otobai is considering still another production method for its electric scooter. It would require an additional investment of ¥20 billion but would reduce variable costs by ¥57,000 per unit.

a. What is the NPV of this alternative scheme? (Do not round intermediate calculations. Enter your answer in billions rounded to 3 decimal places.)

NPV

b. What is the break-even quantity? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

Break-even quantity            

c. Now go back to the original project shown in the problem table prior to the additional investment. Suppose Otobai's management would like to know the figure for variable cost per unit at which the original electric scooter project would break even. Calculate the level of variable costs at which the project would earn zero profit and at which it would have zero NPV. (Do not round intermediate calculations. Enter your answers in dollars per unit rounded to the nearest whole number.)

Zero profit	$
Zero NPV	$

Answer 1

Given data,

The given answers are for the problems a and b.

a)

Unit price		460000
Variable cost	385000-57000	328000

Sale of units(qty)	150000	Amount in lakhs
Contribution	19800000000	198000
Less: fixed Cost	3100000000	31000
Less: Deprecation		40000
Earnings before tax		127000
Less:Taxes @ 50%		63500
Earnings after tax		63500
Add: deprecation		40000
Cash flow		103500
Annuity Factor for 16% for 10 years		4.833
Present value of future outflows		500215.5
Project cost		400000
NPV		100215.5

b) For the calculation of break even we have to do reverse calculation in order to find the quantity.

1) So first consider NPV of the project is '0' then calculate reversely.

Particulars	Amount in Lakhs
Contribution	156528.7
Less: fixed Cost	31000
Less: Deprecation	40000
Earnings before tax	85528.66
Less:Taxes @ 50%	42764.33
Earnings after tax	42764.33
Add: deprecation	40000
Cash flow	82764.33
Annuity Factor for 16% for 10 years	4.833
Present value of future outflows	400000
Project cost	400000
NPV	0

Contribution at break even point = 156528.657

Normal contribution per unit = 132000

Number of units at break even point = 156528.657/132000 = 118582.316