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?