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 $132,000. The tax rate is 22 percent and youYear Market Value ($ millions)1 $ 14.702 $11.703 $9.204 $1.95require a return of 12 percent on your investment. Assume that the price per carton is$16.20.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 are 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.
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 $132,000. The tax rate is 22 percent and you
Year Market Value ($ millions)
1 $ 14.70
2 $11.70
3 $9.20
4 $1.95
require a return of 12 percent on your investment. Assume that the price per carton is
$16.20.
b. What is the minimum number of cartons per year that can be supplied and still
guarantee a zero
least have a zero NPV.
c. What are 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.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images