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 ¥19 billion. The cost of capital is 12%. 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	1.4 million
Market share		.1
Unit price	¥	395,000
Unit variable cost	¥	320,000
Fixed cost	¥	3.4 billion

Otobai is considering still another production method for its electric scooter. It would require an additional investment of ¥19 billion but would reduce variable costs by ¥44,000 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            ¥  billion

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	$

d. Calculate DOL based on the alternative scheme used in part a. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

DOL                                    

Answer 1