An investment of $40,000 today is expected to give rise to annual contribution of $25,000. This is based on selling one product, a volume of 10,000 units, selling price of $12.50 and variable cost of $10. Annual fixed cost of $10,000 will be incurred for the next four years; the discount rate is 10%. Required: (a) Calculate the NPV of this investment. (b) Calculate the sensitivity of your calculation to the following: i. Initial investment ii. Selling price per unit iii. Variable cost per unit iv. Sales volume v. Fixed costs vi. Discount rate
An investment of $40,000 today is expected to give rise to annual contribution of $25,000. This is based on selling one product, a volume of 10,000 units, selling price of $12.50 and variable cost of $10. Annual fixed cost of $10,000 will be incurred for the next four years; the discount rate is 10%. Required: (a) Calculate the NPV of this investment. (b) Calculate the sensitivity of your calculation to the following: i. Initial investment ii. Selling price per unit iii. Variable cost per unit iv. Sales volume v. Fixed costs vi. Discount rate
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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An investment of $40,000 today is expected to give rise to annual contribution of $25,000. This
is based on selling one product, a volume of 10,000 units, selling price of $12.50 and variable
cost of $10. Annual fixed cost of $10,000 will be incurred for the next four years; the discount
rate is 10%.
Required:
(a) Calculate the NPV of this investment.
(b) Calculate the sensitivity of your calculation to the following:
i. Initial investment
ii. Selling price per unit
iii. Variable cost per unit
iv. Sales volume
v. Fixed costs
vi. Discount rate
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