Assume NEWC has an investment opportunity(similar to the air bag opportunity in
ID: 2749560 • Letter: A
Question
Assume NEWC has an investment opportunity(similar to the air bag opportunity in Other People's Money).The firm can spend a product that will be sold in packets or units of twenty.Assume the firm forescats this product to have the same profit margin(NI available to common stock/sales) as the other products in its product portofolio: ($8.52 per 1,000 individual units) and that margin WACC is 11% for this risk class project product. If the firm's sells the same number of units or packets every year for the next twenty years,how many packets (or units) must be sold each year for this to be zero-NPV project?
- Assume CF equals net income available to common stockholders plus depreciation.You may assume depreciation is 45,500 per year.Ignore taxes and ignore changes in net operating working capital,along with salvage value of the equipment used in the production process.You should also ignore any potential tax consequences of salvage value.You should use only the information provided and assume it is complete.Hint: CF must be an annuity(annuity of money) or there are hundreds of answers to this question.
Explanation / Answer
Answer :-
Investment = $ 325000000
Years = 20 years
WACC = 11%
Depreciation = 45500
Net income = 8.52 per 1000 units
Assume No. of units sold = x
Cash flow = (8.52 * x) + 45500
NPV = 0
Present Value - Investment = 0
(67.845x + 362316.5) - 325000000 = 0
67.845x = 325000000 - 362316.5
67.845x = 324637683.5
x = 324637683.5 / 67.845
x = 4784990 (1000 individual units)
Years Cash flow PVIFA at 11% Present Value 1 to 20 8.52x + 45500 7.963 =(8.52x + 45500) * 7.963 TOTAL =67.845x + 362316.5Related Questions
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