Question

Revenues −Manufacturing Expenses −Marketing Expenses −Depreciation	Year 0	Years 1 to 10 3.9 −0.5 −0.15 −0.4
​=EBIT −Taxes ​(40%)		2.85 −1.14
​=Unlevered net income ​+Depreciation −Additions to Net Working Capital −Capital Expenditures	−7	1.71 ​+0.4 −0.4
​=Free Cash Flow		1.71

Panjandrum​ Industries, a manufacturer of industrial​ piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision​ (all quantities in millions of​ dollars). There are some concerns that estimates of manufacturing expenses may be​ low, due to the rising cost of raw materials. What is the​ break-even point for manufacturing​ expenses, if all other estimates are correct and the cost of capital is 12​%?

Answer 1

Assuming Capital Expenditure is 8.00

Revenue	3.90
Manufacturing Exp	-0.50
Marketing Exp	-0.15
Depreciation	-0.40
EBIT	2.85
Taxes @ 40%	-1.14
Unlevered Net Income	1.71
Depreciation	0.40
Addition to Net Working Capital
Capital Expenditure	-0.40
Free Cash Flow	1.71

Capital Expenditure	8.00
Cash flow per year	1.71
Year	10
NPV	1.66188

Using a financial calculator, CF0= -8, CF1=1.71, F1=10 ;calculate NPV at 12% equals 1.66188

I	10.00
PMT	0.29413
Pre-Tax Manufacturing Expense	0.49

using TVM keys, PV=1.66188, N=10, I=10; calculate PMT=0.29413.

Pretax manufacturing expenses=0.29413 / 0.6=$0.49 million