Rediform Concrete is considering a $5 million capital investment for a factory t
ID: 2622852 • Letter: R
Question
Rediform Concrete is considering a $5 million capital investment for a factory to manufacture formed concrete products, such as patio stones, mobile home stones, and lawn decorations. The proposed factory will generate annual sales between $2 million and $5 million. After-tax fixed costs are $500k per year and after-tax variable costs are 50% of sales. Therefore, annual after-tax cash flow for the project is (0.5)Sales.
The expected life of the project is 5 years and the salvage value depends on land prices at the end of five years. The factory would be built on Palmetto Rd., near the Sunshine Expressway. A new freeway exit is being planned for the Sunshine Expressway. If the exit is built at Palmetto Rd., the salvage value of the factory will be $3 million. If the exit is located at one of the two competing roads, the salvage value will be $1 million. Ignore depreciation in your calculations.
Other data: The firm has estimated the level of systematic risk to be 0.75 , the expected return on the market is 12 , and the risk-free rate of return is 4 .
Prepare an analysis that examines the economic break-even for this project. Also, prepare an analysis that examines the project
Explanation / Answer
Economic Break Even point
Economic Break Even point is the point at which the cost or expenses and revenue are equal. It is a no loss no gain situation. Formula for calculating Break Even point:
Fixed Cost / Profit Volume Ratio
In the present Case
Sales
Variable Cost
Contribution
Break Even Point
$2,000,000
$ 1,000,000
$ 1,000,000
1,000,000
$3,000,000
$ 1,500,000
$ 1,500,000
1,000,000
$4,000,000
$ 2,000,000
$ 2,000,000
1,000,000
$5,000,000
$ 2,500,000
$ 2,500,000
1,000,000
Economic Break Even Point at all the three levels is $1000000 because break-even point depends on fixed cost and contribution. Fixed Cost at all the three levels are $500000 and contribution is 50% of the sales.
Sensitivity Analysis
Sensitivity analysis is one of the modern quantitative techniques which take care of risks and uncertainties in capital budgeting investment decisions. It is a technique for evaluating the robustness of a given model by relaxing some of its assumptions through
Sales
Variable Cost
Contribution
Break Even Point
$2,000,000
$ 1,000,000
$ 1,000,000
1,000,000
$3,000,000
$ 1,500,000
$ 1,500,000
1,000,000
$4,000,000
$ 2,000,000
$ 2,000,000
1,000,000
$5,000,000
$ 2,500,000
$ 2,500,000
1,000,000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.