Fixed costs increase before accounting profits turn negative

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Reference no: EM131070678

A project currently generates sales of $12 million, variable costs equal to 60% of sales, and fixed costs of $2 million. The firm’s tax rate is 50%. The project will last for 10 years. The discount rate is 12%.

a-1. What is the effect on project NPV, if sales increase from $12 million to $12.8 million? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

a-2. What is the effect on project NPV, if variable costs increase to 70% of sales? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. Enter your answer as the absolute value of the change.)

b. If project NPV under the base-case scenario is $2 million, how much can fixed costs increase before NPV turns negative? (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round you answer to the nearest dollar amount.)

c. How much can fixed costs increase before accounting profits turn negative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Reference no: EM131070678

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