Newcombe & Associates, Inc. is considering the introduction of a new product. Production of the new product requires an investment of $140,000 in equipment that has a five-year life. The equipment has no salvage value at the end of five years and will be depreciated on a straight-line basis. Newcombe's required return is 15%, and the tax rate is 34%. The firm has made the following forecasts: Base Case Lower Bound Upper Bound Unit Sales 2,000 1,800 2,200 Price Per Unit $55 $50 $60 Variable Costs Per Unit $22 $21 $23 Fixed Costs Per Year $10,000 $9,500 $10,500 Suppose that sales for the project under consideration by Newcombe increases from 2,000 units to 2,200 units per year. Compute the DOL for the project at sales of 2,000 units. Use both the definition of the DOL and its algebraic equivalent. Assume Newcome pays no taxes on this project. Show all work
Newcombe & Associates, Inc. is considering the introduction of a new product. Production of the new product requires an investment of $140,000 in equipment that has a five-year life. The equipment has no salvage value at the end of five years and will be depreciated on a straight-line basis. Newcombe's required return is 15%, and the tax rate is 34%. The firm has made the following forecasts: Base Case Lower Bound Upper Bound Unit Sales 2,000 1,800 2,200 Price Per Unit $55 $50 $60 Variable Costs Per Unit $22 $21 $23 Fixed Costs Per Year $10,000 $9,500 $10,500 Suppose that sales for the project under consideration by Newcombe increases from 2,000 units to 2,200 units per year. Compute the DOL for the project at sales of 2,000 units. Use both the definition of the DOL and its algebraic equivalent. Assume Newcome pays no taxes on this project. Show all work
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:Newcombe & Associates, Inc. is considering the introduction of a new product.
Production of the new product requires an investment of $140,000 in equipment
that has a five-year life. The equipment has no salvage value at the end of five years
and will be depreciated on a straight-line basis. Newcombe's required return is 15%,
and the tax rate is 34%. The firm has made the following forecasts:
Base Case Lower Bound Upper Bound
Unit Sales
2,000
1,800
2,200
Price Per Unit
$55
$50
$60
Variable Costs Per Unit $22
$21
$23
Fixed Costs Per Year
$10,000
$9,500
$10,500
Suppose that sales for the project under consideration by Newcombe increases from
2,000 units to 2,200 units per year. Compute the DOL for the project at sales of 2,000
units. Use both the definition of the DOL and its algebraic equivalent. Assume
Newcome pays no taxes on this project. Show all work
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