Problem 6-35 Financial Break-Even Analysis The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV to zero and solve for the variable in question. Martin Enterprises needs someone to supply it with 152,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost $1,920,000 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 $162,000. Your fixed production costs will be $277,000 per year, and your variable production costs should be $10.60 per carton. You also need an initial investment in net working capital of $142,000. The tax rate is 22 percent and you require a return of 12 percent on your investment. Assume that the price per carton is $17.20. a. Calculate the project NPV. (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the minimum number of cartons per year that can be supplied and still break even? (Do not round Intermediate calculations and round your answer to the nearest whole number, e.g., 32.) c. What are the highest fixed costs that could be incurred and still break even? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. NPV b. Minimum cartons c. Highest fixed costs
Problem 6-35 Financial Break-Even Analysis The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV to zero and solve for the variable in question. Martin Enterprises needs someone to supply it with 152,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost $1,920,000 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 $162,000. Your fixed production costs will be $277,000 per year, and your variable production costs should be $10.60 per carton. You also need an initial investment in net working capital of $142,000. The tax rate is 22 percent and you require a return of 12 percent on your investment. Assume that the price per carton is $17.20. a. Calculate the project NPV. (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the minimum number of cartons per year that can be supplied and still break even? (Do not round Intermediate calculations and round your answer to the nearest whole number, e.g., 32.) c. What are the highest fixed costs that could be incurred and still break even? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. NPV b. Minimum cartons c. Highest fixed costs
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 12E: Refer to Exercise 19.11. 1. Compute the payback period for each project. Assume that the manager of...
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Transcribed Image Text:Problem 6-35 Financial Break-Even Analysis
The technique for calculating a bid price can be extended to many other types of
problems. Answer the following questions using the same technique as setting a bid
price; that is, set the project NPV to zero and solve for the variable in question. Martin
Enterprises needs someone to supply it with 152,000 cartons of machine screws per
year to support its manufacturing needs over the next five years, and you've decided to
bid on the contract. It will cost $1,920,000 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 $162,000. Your fixed
production costs will be $277,000 per year, and your variable production costs should be
$10.60 per carton. You also need an initial investment in net working capital of $142,000.
The tax rate is 22 percent and you require a return of 12 percent on your investment.
Assume that the price per carton is $17.20.
a. Calculate the project NPV. (Do not round Intermediate calculations and round your
answer to 2 decimal places, e.g., 32.16.)
b. What is the minimum number of cartons per year that can be supplied and still break
even? (Do not round Intermediate calculations and round your answer to the
nearest whole number, e.g., 32.)
c. What are the highest fixed costs that could be incurred and still break even? (Do not
round Intermediate calculations and round your answer to 2 decimal places, e.g.,
32.16.)
a. NPV
b. Minimum cartons
c. Highest fixed costs
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