Question

ABC company is considering producing a new range of smartphones that will require it to build a new factory. Feasibility studies have been done on the factory which cost $5 million. The studies have found the following:

1. The factory will cost $25 million and will have a useful life of 20 years.

2. The land where the factory will go is currently used as a carpark for workers and it is assumed that the company will have to pay $200000 per year for their workers to park in a nearby carpark.

3. The factory will be depreciated on a straight line basis and will have a salvage value of $0 but it is believed that most of it can be sold for scrap after 20 years for $50000.

4. Due to the nature of the business they are in, they will have to perform some environmental tests to make sure that some of the chemicals they are using are not entering the ground water around the factory. These tests will be performed every 5 years and cost $625000.

5. Through the building of this factory and the selling of the phones it produces, it’s revenue will increase by $5 million in year 1 and remain at this level for the operational life of the factory.

6. The extra costs that the company accrues per year due to the project are $435000 for labour, $50000 for overhead like power and water bills and marketing costs for the new line of phones will be $500000 per year but will decrease by $15000 per year as the phone gains greater penetration.

7. The company’s current cost of capital is 8% per year.

8. The tax rate is 30%.

9. The project requires an initial investment in working capital of $1000000 that is returned in year 20.

Calculate the break even point for the following variables:

a. The cost of capital.

b. The yearly revenue.

c. The labour cost.

Answer 1

Based on the given information, have prepared the below comuptation;

Table 1 is on information on the given data and intial cash outflow;

Assumptions:

Have assumed the costs incurred on feasbility study also as part of intial cash outfow, presuming that this feasibility study is exclusively for this project.

For Breakeven analysis, have applied "Goal Seek" calculations in excel, and have computed the levels of Cost of Capital %, yearly revenue and the yearly labour cost, to have break even NPV, in respective cases.