Commodore Motors management is considering a project to produce toy cars. The pr
ID: 2759421 • Letter: C
Question
Commodore Motors management is considering a project to produce toy cars. The project would require an initial outlay of $100,000 and have an expected life of 10 years. Management estimates that each year during the life of the project depreciation and amortization would be $8000, capital expenditures would be $4000, additions to working capital would be $2000, and fixed costs would be $3000. Also, each toy car would sell for $15 and cost $7 to produce. Finally, the cost of capital for the project would be 12 percent, cash flow from the project would be taxed at a 25 percent rate, and the assets would be depreciated to a salvage value of $0. How many units must be sold each year in order for this project to break even from an economic standpoint?
Explanation / Answer
15-7=8
8*.75=6
No of units =x
Total =6x
5.650
Equation to solve the above= (-7000+6x)5.650-100000=0
Since for breaking even the NPV should be zero
Solving the above x= 4167 app
Verification--
20.24805
Rounding off error
Initial Outlay Tax saving on dep Cap Exp Working Cap Fixed Cost Net of tax saving each year per unit Total 1.120 0 100000 0 0 0 0 -100000 1 2000 -4000 -2000 -3000 6x -7000+6x 0.893 2 2000 -4000 -2000 -3000 6x -7000+6x 0.797 3 2000 -4000 -2000 -3000 6x -7000+6x 0.712 4 2000 -4000 -2000 -3000 6x -7000+6x 0.636 5 2000 -4000 -2000 -3000 6x -7000+6x 0.567 6 2000 -4000 -2000 -3000 6x -7000+6x 0.507 7 2000 -4000 -2000 -3000 6x -7000+6x 0.452 8 2000 -4000 -2000 -3000 6x -7000+6x 0.404 9 2000 -4000 -2000 -3000 6x -7000+6x 0.361 10 2000 -4000 -2000 -3000 6x -7000+6x 0.32215-7=8
8*.75=6
No of units =x
Total =6x
5.650
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