Reference no: EM133071523

Capital Budgeting and Breakeven Analysis

The Newport Company manufactures  backpacks. The company is considering  expanding to the laptop case market. The proposed investment plan includes:

• Annual production is fixed at 5,000 units.
• Each of the laptop case will be sold at a price of $45 at the first year. The company estimates that it can raise the price of the laptop cases by 10% in each of the following years.
• Variable costs are estimated at $30 per laptop case but due to the expected rise in labor costs they are expected to rise at 5% per year.
• Advertising campaign: The head of the marketing department estimates that the campaign will cost $80,000 annually.
• Fixed cost of the new department will be $40,000 annually.
• Net working capital requirement is expected to be 10% of next year's total revenue.
• Purchase of a new machine: The cost of the machine is $150,000 and will be depreciated on a straight line basis over 6 years toward zero value. But the chief economist of the company estimates that it can be sold for $10,000 when the project terminates.

The project's cost of capital is 15% and the corporate tax rate is 40%.

a) What is the NPV and the IRR when annual production is 5,000 units?

b) What is the break-even annual production quantity for this project?

Constant Annual Production
		Year 1	Year 2	Year 3	Year 4	Year 5
Quantity sold (Q)
Price per unit (P)
Unit price growth rate
Average variable cost (AVC)
Average variable cost growth rate
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Revenue (P*Q)
Variable Cost (AVC*Q)
Fixed Cash cost
Advertising
Other fixed cost
EBITDA
Depreciation
Earnings Before Interest and Taxes
Tax
Net Operating Profit After Taxes
Depreciation
Investment in Net Working Capital
Investment in Fixed Assets
Free Cash Flow (FCF)
Cost of Capital
Net Present Value
Projected Net Working Capital Level
Investment in Net Working Capital
Historical Cost of Fixed Assets
Ending Book Value