Assume NEWC has an investment opportunity(similar to the air bag opportunity in

Question

Assume NEWC has an investment opportunity(similar to the air bag opportunity in Other People's Money).The firm can spend $325 million on refurbishing its wire and cable plant to develop 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 the 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 of 20) must be sold each year for this to be zero-NPV project?

Explanation / Answer

Let the no. of packets be "x"

..

Profit Margin on 20 units = 8.52/1000 * 20 = 0.1704 per packet

For a Zero NPV Project , NPV = 0

NPV = o

P.V of Cash Inflows - P.V of Cash Outflows = 0

(0.1704*x)*PVIFA(11%,20) = 325,000,000

0.1704*x*7.9633 = 325,000,000

x = 239,508,369 packets ...Ans

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