Your firm is interested in selling a new type of headphone. The machinery to build these headphones costs $300,000 (at year 0) and will be used for 10 years. At the end of these 10 years, the machine is worth nothing. The price of these headphones is $175 and the cost to produce each pair is $45. There are annual (years 1 through 10) fixed costs of $320,000 to produce the headphones. You will depreciate the machine using straightline depreciation. The appropriate discount rate is 13% and your firm's marginal tax rate is 35%. Use GOALSEEK to find the minimum number of headphones you need to sell each year in order to breakeven (i.e. have an NPV of zero).   Hint: You are going to have to find the annual free cash flow (FCF) produced by this project each year

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
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Your firm is interested in selling a new type of headphone. The machinery to build these headphones costs $300,000 (at year 0) and will be used for 10 years. At the end of these 10 years, the machine is worth nothing. The price of these headphones is $175 and the cost to produce each pair is $45. There are annual (years 1 through 10) fixed costs of $320,000 to produce the headphones. You will depreciate the machine using straightline depreciation. The appropriate discount rate is 13% and your firm's marginal tax rate is 35%. Use GOALSEEK to find the minimum number of headphones you need to sell each year in order to breakeven (i.e. have an NPV of zero).

 

Hint: You are going to have to find the annual free cash flow (FCF) produced by this project each year.

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