Question

Pip’s Pajamas is considering a project to produce and sell holographic sleepwear. Pip’s CEO, Delilah Garfunkel, has provided you with the following information about the project. Estimated sales are 100,000 units per year for each of the next 12 years. The pajamas will sell for $60 per unit. After that the project will be stopped. Production of the holographic pajamas requires the purchase of a special laser. The laser costs $5 million dollars and lasts for 4 years. In the fifth year (after it is purchased) the spent laser can be sold for an estimated $1 million. Notice that since the project lasts for 12 years, and the laser lasts only for 4 years, Pip’s will have to replace the laser when it wears out. So, they will need to buy the first laser in year 0, the second in year 4, and the third in year 8. The lasers can be depreciated to zero over four years using straight-line depreciation. Other costs for the project are estimated to be $2 million per year for each of the next 12 years. Net working capital requirements are negligible for this project. Pip’s tax rate is 34%. The appropriate discount rate to use for the project is 14% a. Calculate the NPV of the holographic pajama project. b. Calculate the number of units sold per year needed for Pip’s to breakeven in terms of NPV.

Answer 1