Guthrie Enterprises needs someone to supply it with 142,000 cartons of machine screwsper year to support its manufacturing needs over the next five years. It willcost $1,820,000 to install the equipment necessary to start production; you’ll depreciatethis cost straight-line to zero over the project’s life. You estimate that in five years thisequipment can be salvaged for $152,000. Your fixed production costs will be $267,000 peryear, and your variable production costs should be $9.60 per carton. You also need aninitial investment in net working capital of $132,000. The tax rate is 22 percent and you require a return of 12 percent on your investment. Assume that the price per carton is$16.20.a. Calculate the project NPV.b. What is the minimum number of cartons per year that can be supplied and stillguarantee a zero NPV? Verify that the quantity you calculated is enough to atleast have a zero NPV.c. What is the highest fixed costs that could be incurred and still guarantee a zeroNPV? Verify that the fixed costs you calculated are enough to at least have azero NPV.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Guthrie Enterprises needs someone to supply it with 142,000 cartons of machine screws
per year to support its manufacturing needs over the next five years. It will
cost $1,820,000 to install the equipment necessary to start production; you’ll depreciate
this cost straight-line to zero over the project’s life. You estimate that in five years this
equipment can be salvaged for $152,000. Your fixed production costs will be $267,000 per
year, and your variable production costs should be $9.60 per carton. You also need an
initial investment in net working capital of $132,000. The tax rate is 22 percent and you require a return of 12 percent on your investment. Assume that the price per carton is
$16.20.
a. Calculate the project NPV.
b. What is the minimum number of cartons per year that can be supplied and still
guarantee a zero NPV? Verify that the quantity you calculated is enough to at
least have a zero NPV.
c. What is the highest fixed costs that could be incurred and still guarantee a zero
NPV? Verify that the fixed costs you calculated are enough to at least have a
zero NPV.

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